Stocks may ride into the new year with the wind in 2021, but the jobs report and the Fed will be sharp

The week ahead is back with a busy economic calendar to kick off the new year, including the ever-important monthly jobs report.

After a fantastic 2021, 2022 stocks will head off with a tailwind, but what the market will do in the new year will depend more on solid earnings growth and a strong economy than on a super-easy Federal Reserve.

The S&P 500 was up 27% to 4,766 in a stellar year, hitting 70 all-time highs. The benchmark outperformed the 19% gain in the Dow Jones Industrial Average and the 21% gain in the Nasdaq Composite.

With Monday’s opening bell, the clock is ticking for a quarter that could see the Fed’s first rate hike since 2018. expectations for where interest rates will go over the course of 2022.

The employment report is the main data on a calendar that also includes data from the ISM manufacturing survey and auto sales, both slated for Tuesday. International trade data will be released on Thursday.

According to Dow Jones, economists expect 405,000 jobs to be created in the final month of 2021, up from 210,000 in November. The unemployment rate is expected to fall from 4.2% to 4.1%.

“It’s the start of a new year. History would tell you we have to start it off in a pretty strong way, especially considering we’ve seen this kind of rolling correction,” said Sameer Samana, senior global equity strategist at Wells Fargo Investment Institute. “We appreciate the fact that the S&P has hit new highs, but if you look at average stocks or small-cap stocks, they’ve had a very different experience.”

The 2021 market was split with an initial surge of some high-growth growth stocks, but then many of those names fell hard and some of the big-cap names in the S&P 500 delivered supercharged performances.

Microsoft rose 51% for the year, while Apple gained 34%. Home Depot was up 56% and American Express was up 35%. Ford rose 136%.

The ARK Innovation ETF, a high-flying collection of growth stocks in 2020, fell 24% this year.

Fed forward

The Fed will release the minutes of its December meeting on Wednesday. After that meeting, the central bank announced it would accelerate the phasing out of its once $120 billion-a-month bond-buying program — now ending it in March instead of June. The March meeting is now seen as the Fed’s first chance to push a rate hike. The Fed has forecast three for 2022.

“I think next week people will start to shift to this changing monetary landscape. It’s such a big deal,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “We’ve never seen the liquidity flows of the past two years.”

Strategists expect 2022 to be more choppy for the stock market as the Fed ends its bond purchases and starts raising interest rates from scratch. Equity strategists have a median target of 5,050 for the S&P 500, according to CNBC’s Strategist Survey.

Boockvar said the impact of the tightening policies will be felt globally as other central banks also cut their asset purchase programs and move to raise interest rates.

“That liquidity flow is slowing, and we know how much help it has been,” Boockvar said. “You can’t separate a Fed tightening cycle from the stock market. You can’t separate the market. They are all interconnected. There is no such thing as avoiding the tightening of financial conditions.”

Wells’ Samana said he is focusing on quality in US big-cap stocks for the new year. “You have to take what the market gives you and what it’s giving you now is there aren’t many reasons to part with the US large cap,” he said. “We like technology, we like communication services. We like financials and we like industrials. Two growth sectors and two cyclical sectors. We have reduced it to anything but defensive.”

Samana said Wells strategists have downgraded the materials and energy sectors. At the same time, they upgraded the technology. “We want to be in a much more balanced position in 2022, we just don’t know what opportunities will arise.”

Energy was the best performing of the major sectors in 2021, up 48%, its best ever increase. It was followed by real estate, which rose 42%. Technology was up 33% and financials was also up 33%.

Matt Maley of Miller Tabak pointed out that the Consumer Staples Select Sector SPDR Fund outperformed technology and semiconductors in December. The fund was up nearly 10%, while the Technology Select Sector SPDR Fund gained 3% this month.

“In other words, that stock market action over the past few weeks has been very different from what it seemed to many people. We haven’t seen a melt-up… and tech stocks haven’t fared as well as most people think,” Maley wrote in a note: “More importantly, one of the most defensive groups on the market is the one that made a nice rally. In our view, this tells us that investors are quite concerned about the effect the Fed’s new (more aggressive) tightening cycle could have on the stock market next year.”

OPEC+ meets on Tuesday and is expects to continue its policy of slowly bringing oil back to the market.

Week ahead calendar

Monday

9:45 AM Production PMI

10:00 a.m. Construction Expenses

Tuesday

Income: MillerKnoll

Vehicle sales

10:30 am ISM production

10:00 a.m. JOLTS

Wednesday

8:15 a.m. ADP employment

9.45 am Services PMI

2:00 PM FOMC minutes

Thursday

Income: Bed Bath and Beyond, Constellation Brands, Conagra, Walgreen Boots Alliance, PriceSmart, WD-40, Lamb Weston

8:30 am First claims

8:30 am International trade

10:00 am ISM services

10:00am Factory Orders

1:15 p.m. St. Louis Fed President James Bullard

Friday

8:30 am Employment Report

10:00 a.m. San Francisco Fed President Mary Daly

12:15 p.m. Atlanta Fed President Raphael Bostic

12:30pm Richmond Fed President Tom Barkin

3 p.m. Consumer credit

Saturday

12:15pm Boston Fed’s Bostic