Some strategists say it's beginning to look a lot like Christmas — the one in 2018 when the stock market sold off hard into Christmas Eve and then bounced on Dec. 26. But there are plenty of differences, and there are no guarantees it will play out quite the same. For one, the S & P 500 is less than 4% off its high. In 2018, the S & P 500 was down 19.6% from its high in the shortened Christmas Eve session, ending the day 2.7% lower. The index then bounced just shy of 5% in the next trading session after Christmas Day. The turbulence of 2018 was unlike most Decembers, when the market moves higher, especially in the final days of the year. Indeed, 2021 was lining up to be one of those years, in which strategists expected a "Santa Claus" rally would push a lofty market higher. Instead, stocks sold off Monday, following a week of volatile trading. The decline was driven by fears about the rapid spread of the Covid omicron variant and Federal Reserve tightening. Adding to the negative tone was news over the weekend that President Joe Biden's social spending bill is not likely to get enough support in the Senate. "What we're still saying is we believe this is a short-term sell-off that is triggered by elevated valuations that need to be adjusted ahead of higher interest rates," said Sam Stovall, chief investment strategist at CFRA. He said it seems the sell-off could reach an end soon, adding that in many ways this tumult is not like the late 2018 shake-up — other than the fact that it's happening in December. "I'm thinking we could have a bounce only because bears are coming out of the woodwork," Stovall said. A 'double whammy' of worries The Federal Reserve last week announced it would speed up the taper of its pandemic-era bond-buying program. Fed officials also forecast three quarter-point rate hikes for 2022. "This is going to be a double whammy of this virus and the Fed," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. "When you consider all the market has been thrown – inflation coming in stronger than expected, the Fed telling you it's going to hike [rates] and the omicron variant is spiking like crazy — and the market is down only 4%." "This is not a panic," he added. Golub said the market tone is different from that of 2018, a time when investors were worried about the central bank preparing to tighten monetary policy . "This is a completely different thing. The market was concerned the Fed was going to disrupt the economy by tightening," he said. Now, even though the Fed has signaled it is heading toward tightening, interest rates are at zero and the central bank will change course if Covid is negative for the economy. "We have an incredibly accommodative Fed. If other conditions are worse it clearly will modify its actions," Golub said. "I don't think the market sees the Fed as an adversary." 'Closer to the end' of the selling? Tom Lee, head of research at Fundstrat Global Advisors, said there could be an echo of 2018 in the sell-off in that technically the market could be setting up for a near-term bounce just before the Christmas holiday. "To me stocks have been weak for a while, so they've been worried about this, and it's not necessarily a new fear for the market. If anything, we're closer to the end of the selling," he said. Lee said unless Covid becomes a permanent drag on the economy, investors are overreacting. "In six months is anyone going to wish they had bought? Yes," he said. Stovall said even if the market does bounce, it will remain constrained by uncertainty. He said the S & P could hit his "line in the sand," at 4,300. The S & P 500 closed at 4,568.02, off 1.1%. "I think right now uncertainty rules the day, and it's plausible we go into at least a pullback, if not even a correction," Stovall said. But he said the lightness of holiday trading activity could also speed up — in the short term — the sell-off and a rebound. "It's giving us a very good taste of the volatility we are likely to experience next year," he said. The second year of any presidential term is more volatile, and he expects the same for President Joe Biden in 2022. "Second and third quarters have volatility that is 30% and 80% higher than the average for the other 14 quarters of a 16-quarter presidential cycle," he said. Legislative uncertainty The expected failure of the stimulus bill, which will still go to the Senate for a vote, may not be that negative, said Golub. "I had expected a bad opening on Monday because we had a lot of news flow on the weekend. There's no positive incremental news. It's all incrementally negative," he said. "We have an inflation problem and we were trying to pass a large stimulus bill. From a stock market perspective, as much as people may say this was negative, I'm not sure that it was actually negative." Golub said the bill would have meant higher taxes and more inflation. "As much as there might be a soft patch for a quarter or so as people pull back on their spending, we still have a very vibrant and healthy economy. This isn't an economy that needs additional support," he said. Golub said investors should not be worried about the sell-off. "If this thing were down 8% or 10%, I'd be the first one to jump on the table and say buy," he said. Fundstrat's Lee said it would help if the Biden administration shifts its focus from the number of new Covid cases to the impact on the health-care system and the severity of the cases, with so many people experiencing milder symptoms. "My interpretation is the White House is fully realizing they need a shift in messaging on Covid," Lee said. The president will deliver a speech on omicron Tuesday . Lee said the rapidly spreading variant could move quickly, and South Africa is showing signs of improvement. "That's in 25 days, so from a market perspective there's an expiration date. One thing the market can tend to start to get comfortable with when it has this ability to judge how long it's going to take," he said. "As bad as things feel right now, for the market, we're also going to be emerging from this on the other side."
A trader in a face mask works on the trading floor at the New York Stock Exchange (NYSE) as the Omicron coronavirus variant continues to spread in Manhattan, New York City, U.S., December 20, 2021.
Andrew Kelly | Reuters
Some strategists say it's beginning to look a lot like Christmas — the one in 2018 when the stock market sold off hard into Christmas Eve and then bounced on Dec. 26.