US Stock Market Set For Christmas Rally

Sam Stovall, Chief Investment Strategist at CFRA Research in New York, remarked, "We've had a solid year, but history shows that December can sometimes move to its own beat."

As the year 2023 draws to a close, U.S. stock markets find themselves in a state of significant gains after a tumultuous ride.

Investors are now closely monitoring various factors that could influence equities in the remaining weeks of the year, with particular attention to tax loss selling and the renowned Santa Claus rally.

A pivotal determinant of stock market performance continues to be the anticipated course of the Federal Reserve’s monetary policy.

Concerns about a cooling economic growth scenario have spurred speculations that the U.S. central bank might initiate rate cuts as early as the first half of 2024.

This anticipation has ignited a rally that propelled the S&P 500 to an impressive 19.6% year-to-date gain, culminating in a new closing high for the year.

Simultaneously, seasonal patterns have played a substantial role this year. In the historically weak month of September, the S&P 500 recorded a nearly 5% decline.

October, notorious for its volatility, witnessed wild market swings. November, traditionally a strong month, delivered a robust 9% gain.

Sam Stovall, Chief Investment Strategist at CFRA Research in New York, remarked, “We’ve had a solid year, but history shows that December can sometimes move to its own beat.”

Investor focus in the upcoming week will be on the release of U.S. employment data on December 8, which will provide insights into the sustainability of economic growth.

Historically, December has proven to be the second-best month for the S&P 500, with an average monthly gain of 1.54% since 1945, according to CFRA. It is also the month most likely to yield positive returns, with the index posting gains 77% of the time.

Research from LPL Financial indicates that the latter half of December tends to outperform the first part of the month, known as the Santa Claus rally.

Since 1950, the S&P 500 has averaged a 1.4% gain in the second half of December, compared to a mere 0.1% gain in the first half.

However, stocks that have underperformed may face additional pressure in December due to tax loss selling, as investors seek to realize write-offs before year-end.

Historical trends suggest that some of these shares may rebound later in December and into January as investors return to undervalued assets.

It’s worth noting that despite the substantial year-to-date increase in the market, many investment portfolios may still contain underperforming stocks.

Approximately 72% of the S&P 500’s gains have been driven by a handful of mega-cap stocks like Apple, Tesla, and Nvidia, which carry significant weight in the index.

Concerns about investor exuberance have arisen following November’s substantial rally, leading to significant movements in speculative market assets.

For instance, Roku surged 75%, Coinbase Global climbed 62%, and Cathie Wood’s ARK Innovation Fund recorded its best monthly performance in five years, with a 31% gain.

Michael Hartnett, Chief Investment Strategist at BofA Global Research, has noted that their contrarian Bull & Bear indicator recently moved out of the “buy” zone, signaling potential caution among investors.

In his Friday note, he advised against chasing the recent rally, implying that prudence may be the order of the day.