Is Santa Claus Coming To Town?

Photo by Wance Paleri on Unsplash
 

We started 2022 with an endless list of worries including high inflation, rising interest rates, rising energy costs, continued Covid lockdowns snarling supply chains, Russia’s invasion of Ukraine, and recession fears.

Most of these concerns continue to linger prompting investors to wonder if Santa Claus is coming to town this year. A Santa Claus rally is a sustained increase in the stock market in the weeks leading up to Christmas. Numerous theories surround the Santa Claus rally including tax considerations, increased holiday shopping, optimism brought on by the seasonal spirit, and the investment of holiday bonuses.

Instead of checking the Naughty and Nice list, jolly Mr. Market, wearing a Santa suit, will check the Better or Worse list. While inflation is still near 40-year highs, recent inflation reports point to inflation trends becoming better rather than getting worse. Both the October CPI and PPI inflation reports came in better than expected. The direction is more important than the level of the market at this point. The same goes for interest rates. While the Federal Reserve is expected to continue to raise interest rates after four consecutive 0.75% increases, future rate increases may moderate with December’s increase expected to come in at 0.5%...better, not worse.

Despite the winter season approaching, energy costs are better than the $ 5-a-gallon gas prices we paid this past summer. Oil prices slipped by a third from a peak of $120 a barrel to less than $80 a barrel recently.

Supply chain constraints are also getting better. Companies in diverse industries, such as Fastenal (FAST), TJX (TJX), and Cisco Systems (CSCO), all reported improved supply chains in the latest quarter as the Covid lockdowns in China eased.

The tragic war between Russia and Ukraine continues. Ukraine has defended itself better than Russia expected. With Russia retreating from key cities in Ukraine, The Economist recently published an article, “Imagining Peace in Ukraine,” and described how a stable and successful country could emerge from the trauma of Russia’s invasion.

After GDP growth resumed in the third quarter, recession ruminations quieted. With unemployment still at low levels, ADP (ADP) noted it would be a “strange” recession with full employment. While many economists still expect a recession in 2023 given the relentless rise in interest rates, Visa’s CEO (V), Al Kelly, expects any downturn in the economy to be “short and shallow.”

As Mr. Market double-checks the Better or Worse list, all the concerns from the beginning of the year appear better than worse. That, along with reasonable valuations for most of our high-quality companies, clears the way for Santa Claus to arrive on schedule even as the grumpy Grinch lurks in the background.

Meanwhile, Santa has already started to stuff our stockings with goodies. ‘Tis the season for dividend increases with Accenture (ACN) accelerating its dividend 15%, ADP processing a 20% dividend increase, Brown-Forman (BF-B) boosting its dividend a cheery 9%, Hormel (HRL) raising its dividend a meaty 6%, Microsoft (MSFT) booting up a 10% dividend increase, Nike’s (NKE) dividend racing 11% higher, Starbucks (SBUX) brewing up an 8% dividend increase, Texas Instruments (TXN) increasing its dividend 8% and Visa supercharging its dividend 20%. Most of these companies have steadily increased dividends for decades while also expanding substantial share buyback programs thanks to strong cash flows.

With sleighs full of cash, Berkshire Hathaway (BRK-B) and Johnson & Johnson (JNJ) placed the big pre- sents under the tree this year through acquisitions. Berkshire went shopping earlier this year and recently wrapped up the acquisition of Alleghany for $11.6 billion in cash. Johnson & Johnson announced the acquisition of Abiomed for $16.6 billion in cash and is putting the finishing touches on the deal which is expected to close in early 2023. Happy Holidays!

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