S&P 500 Index: Three boosters for the Santa Rally to backfire once the festive season concludes

The S&P 500 has hit new all-time highs amid optimism about Omicron. There are three major drivers for the upbeat mood, but they could easily reverse and cause a nasty New Year's hangover, according to FXStreet’s Analyst Yohay Elam.

Omicron optimism

“Pressure on health systems is what triggers lockdowns imposed by authorities or consumers' avoidance of going out and spending. As Omicron is not causing such a burden on wards, the full reversal of markets from the blows suffered since late November is fully explained. However, the story is more complicated. It is unnecessary for people to need medical assistance for Omicron to incur economic damage. As seen over the Christmas weekend, thousands of flights were canceled due to aircrew testing positive or needing to isolate due to exposure to a sick person. That could broaden to additional industries, exacerbating staff shortages.”

China's U-turn

“China eased credit conditions, is set to loosen its grip on the construction sector and also wants to frontload stimuli. That is music to markets' ears. However, timing is everything. Authorities want its people to be cheerful ahead of the Winter Olympics in February, taking place around the Chinese New Year. Xi and his colleagues could return to cracking down once these key events are over. Markets may become aware of the calendar even before February.” 

Fed-fest

“One of the reasons for the more recent cheer was that Powell refrained from signaling a rate hike in March, but probably later on. However, if core inflation remains high, the Fed could act sooner. Officials at the world's most powerful central bank could begin laying the ground for an early rate increase as early as next week. The US releases fresh employment figures, which could show robust hiring around the holidays and an increase in wage pressures. Higher pay is linked to future inflation.”

See – S&P 500 Index set to race higher above the 5000 level – Credit Suisse