Ryan Detrick, LPL Financial Chief Market Strategist, joins Yahoo Finance Live to discuss the likelihood of a Santa Claus rally, his price target for the S&P 500 in 2022, Fed rate hikes, and the calls that didn’t pan out in 2021.

Video Transcript

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BRIAN SOZZI: The clock has officially begun on a potential year-end Santa Claus rally for the stock market. A Santa Claus rally is when the market rallies, on average, the last seven trading days of a year and the first two of the new year. LPL Financial Chief Market Strategist Ryan Detrick has been crunching the numbers on this and joins us now. Ryan, nice to see you again. Thanks for making some time.

Talk to us. Santa Claus rally-- how likely is it that it happens this year?

RYAN DETRICK: Yeah. First of all, thanks for having me back, guys. And we think it's likely. Again, it is the last five trading days of the year and the first two of the next following year. That would be next Monday. And historically, Brian, what really matters about this-- it's up like, 1.3%, on average, higher, like almost 80% of the time. So Santa Claus normally comes to town. And after this choppy, volatile, almost frustrating December, we think as we get to the feel-good time of the year, stocks probably go a little higher.

What really matters, though, is if Santa Claus doesn't come to town. Again, it's rare, but we've seen 2000, 2008, 2016 if you remember the first six weeks of 2016, how bad that was. So the times that Santa Claus doesn't come might have our ear a little bit more. But we'll talk more about that early next year. But we think we'll make it.

- Yeah. And just to put a fine point on it here, the average return during this seven-day period is 1.3%. And things are positive 79% of the time. So it's likelier than not that we will see stocks go higher here in this little last stretch of the year, first stretch of next year.

RYAN DETRICK: That's right. And that might not sound like a lot, 1.3%. That's actually, like, the best seven-day combination there is, or one of the best, and up 79% of the time. That's one of the most likely of the entire whole year. There's 254 trading days a year. I think we're showing it there. That's, again, one of the most likely times to be higher. So what matters is probably more if he doesn't show. But history would say we'll probably get a little continuation here, higher upward buys into early next year.

BRIAN SOZZI: All right. We have a very wide-- just a gulf between opinions on Wall Street strategists and where the S&P 500 may end next year. High-end target-- 5,330 by John Stoltzfus at Oppenheimer. We talked to him yesterday. 4,400 on the low end by Mike Wilson over at Morgan Stanley. Where are you, and why?

RYAN DETRICK: We're a little closer to the upper range, I guess. We're saying 5,100 on the S&P 500. We just do not see a recession next year. We see earnings growth maybe hitting double digits. I mean, think about this, guys. We're probably going to be up 20% for the year in the S&P. That next year has been higher the last nine times, seven of them up at least double digits. The average return after 20% return is 11.5%.

Putting this another level, we looked at 30 mid-cycle years, going back to 1950, so a year that's not really near the beginning but not near a recession. There's 30 of them. That following year, or that year of a midterm cycle where we are with it next year, is up-- are you ready for this-- 11.5% on average. There's that number again, higher about 80% of the time.

I just listed multiple things there. But strong earnings growth, [INAUDIBLE] still a tailwind with the Fed. Monetary fiscal policy is still there. We just still think, hey, stocks are probably still going to outperform bonds next year. It's going to be rockier. It is a midterm year, right? Those are the most volatile of the four-year cycles. So it's not going to be easy like this year was. But again, after 20-something percent gain this year, who wouldn't take a low double-digit return next year? We think it's possible.

- And hey, Ryan, one of the other, obviously, big variables next year is going to be the Fed probably raising interest rates. At least that's what they're telling us they're going to do. How do stocks tend to perform in that year when the Fed starts raising?

RYAN DETRICK: Yeah, great question. Let's take it back a second here. If you look at the last nine times the Fed did the first hike in a cycle, you know what the stock market did? A 15% on average. So it tends to go up before that first hike.

Now, that first hike, in our opinion, it's probably going to be the second half of next year, not going to be made. But it's probably going to happen next year. The last four times you go back in history, guys, and you have that first hike-- take a wild guess-- stocks do really, really well, up double-digit returns a year later. So it's just a sign that maybe we're taking the training wheels off, right?

The first hike, it doesn't mean you're at the end of a cycle. It means you're probably more in the middle of a cycle. We've still got probably a couple more years of economic growth, and that probably means stocks continue to outperform bonds. So we might have volatility, but do not panic when the Fed has its first rate hike. Because when you get three or four rate hikes down the road, maybe then I wouldn't say panic or maybe you start to worry. But rate hikes are normal in an economic expansion.

BRIAN SOZZI: Ryan, we're asking all our friends of the show, are there calls this year that didn't work out for you? And what did you learn from them, and how will you apply that to next year?

RYAN DETRICK: Yeah, I mean, overall, we said stocks do a lot better than bonds. So fortunately, that worked out. I mean, I will say, we were in the cyclical value camp. Now, you can argue it's kind of worked, kind of hasn't. So that's a little tougher.

But the one that I'd say we've missed, if you want to get to it-- the US dollar. We thought the US dollar would go lower this year. Everybody thought the US dollar would go lower this year. It's been stronger. I think the way that I look at that is when everyone's on one side of the boat-- again, a year ago, most people expected a weaker dollar. We were in that camp. When everyone's on one side of the boat, sometimes you can get the opposite side to move. So I think market psychology and how people are aligned is something that we-- all investors need to remember that.

What did Patton say? If everyone is thinking alike, somebody isn't thinking. Well, I think that makes sense and a good reminder there.

BRIAN SOZZI: You were bullish on the Bengals before the season, right, Ryan?

RYAN DETRICK: Yeah. As a lifelong Bengal fan, it's hard to get very bullish because we always get our hearts broken. But I was optimistic. You know, I'm a market strategist. I'm cautiously optimistic, right? The Bengals are in first place as we speak, so I'm feeling pretty good.

BRIAN SOZZI: All right. Good stuff. LPL Financial Chief Market Strategist Ryan Detrick, always good to see you. We'll check back with you in the new year.