After a volatile start to the month the traditional Santa Rally kicked in during the penultimate week of the year in the lead up to Christmas Day (and has continued overseas in the overseas markets that have been trading since then). The US and Continental Europe were up almost 5% while Australia, the UK and Japan were up around 2% and China and Emerging Markets were up a bit less. In contrast to the rest of a quite polarised 2021 the rally of the last week was strikingly inclusive with the vast majority of stocks in the MSCI World index rising but again led by the larger tech stocks (Apple and Microsoft were up another 5% each and Tesla rebounded by some 17%).

The most peculiar (and quite widely held) view we have read in the mainstream press was that the US inflation report for November published at the beginning of the week of 6.8% (4.9% ex food and energy) helped settle markets. This was the highest reading since 1982 but the fact that it was in line with already high expectations is apparently a sign that that inflation may have peaked. We think Andrew Hunt’s pre-Christmas missive explaining just how strong US liquidity trends and credit growth had been in the lead up to Christmas is probably more on the money. This is despite tough talk by the Fed and also fits the positive sentiment across all sectors and especially tech. It may also have helped that, even though Omicron COVID infections are accelerating around the world, there is a distinct possibility that wide spread but milder illness will help us all achieve some kind of herd immunity sooner rather later and markets are now seeing an end(ish) game in the next 3-6 months.

Australian stocks were also mostly up last week, and those that didn't rise weren’t down by much with one notable exception. Magellan fell another 30% after a very large UK distribution client moved some $23bn of assets under management away from the fund manager and what had been a run of bad luck has started to look like ‘blood in the water’ and this latest fall implies a fear that other institutions and eventually retail investors might follow suit. Still, with the stock now down almost 70% in the last 6 months maybe some of that is in the price by now. On a more positive note CSL rebounded as the broker community became less sceptical about its Vifor acquisition and the prospects of breaking into the growing kidney disease market. CSL’s share price jumping by 8%, adding 0.5% to the overall market return.

Amidst all this optimism one might, in another monetary age, have expected the bond markets to start sniffing out higher future interest rates (and negative returns for bond holders) but they remained stable and real (after expected inflation) rates even eased a little intro deeper negative territory. This could be because bond markets are seeing more difficult times for debt laden governments and economies further out or, again, it could just be due to excess liquidity and central banks wishing to avoid a repeat of the rout we saw between Xmas and New Year in 2018.

Either way, with two more trading days until the end of the year, the markets would have to throw a pretty big tantrum to spoil the 2021 market party and, for many that have had an otherwise difficult year, incredibly benign market conditions will have at least been a silver lining. For all those that are less exposed to markets but are just exposed to rising inflation this is less comforting, something that is sure to be high on the agenda of governments and central banks in 2022.