The S&P 500 rose an average of 1.6% during December, the highest average in any month and more than double its 0.7% gain in any month, according to data from data firm CFRA Investment Research. Meanwhile, September was the worst month on average for stocks, with an average decline of 0.7%.
Many investors will welcome the gains after they have seen the S&P 500 down about 16% since the start of the year. However, the actions taken by the US Federal Reserve to aggressively tighten interest rates to fight inflation weighed on the market.
“December is usually a good time for investors, but they’re stuck now because it’s really the focus on prices that will push the market up or down in the short term,” said Sam Stovall, chief investment analyst at CFRA Research.
“The question this year is whether the Fed will raise 75 or 50 basis points, and if there are some dovish comments that the Fed will raise rates one or two times next year, and then stop,” Stovall said.
December is usually a good month as fund managers buy stocks that have outperformed throughout the year in so-called “window dressing” in their portfolios as there are inflows late in the month. year and liquidity declines during the short holiday weeks, Stovall said.
Meanwhile, in the last five trading days of December and the first two days of January, US stocks are up 75% since 1945, according to the CFRA, in the so-called Santa Claus Rally. This year, the period begins on December 27th. The Christmas Eve average rally has pushed the S&P 500 up 1.3% since 1969, according to the stock market calendar.
This year, however, investor attention has shifted largely to the Federal Reserve and the pace at which it will continue to raise interest rates as it tries to cut inflation by about 40 years.
“Investors tend to be optimistic at the start of the new year, but this is still the Fed market,” said Brian Jacobsen, chief investment analyst at Allspring Global Investments. The old saying is the trend is your friend and don’t fight the Fed, but now it’s “The Fed is not your friend, so don’t fight the trend.”
Investors are pricing in a 75% chance that the Fed will raise interest rates at its December 14 meeting by 50 basis points to a target rate of 4.5%, while the probability of another jumbo move is 75 basis points. The base is 24% according to CME’s FedWatch a tool.
Minutes of the Fed’s meeting on Wednesday, released on November 2, showed that a “significant majority” of policymakers agreed that “it will likely be appropriate soon” to slow the pace of rate hikes. Although Fed members say there is “significant uncertainty about the ultimate level” of how prices will rise.
Another outrageous rate hike could set back the S&P 500’s double-digit rally since early October, driven in large part by hopes that inflation has reached a 40-year high, allowing the Federal Reserve to slow down and perhaps halt its most aggressive rate-raising cycle since. That moment. The seventies.
Fed Chairman Jerome Powell, who will speak on November 30, has indicated that the central bank may pass more modest rate hikes next month, but also said rates could eventually be higher than the 4.6% that politicians estimated in September was needed by Next year.
Analysts wrote that the “sharp drop in the valuation of public and private companies is a painful consequence” of rising interest rate costs and is likely to mean the S&P 500 will drop 9% to 3600 over the next three months. Note on Monday.
However, there may be other reasons to hope for another seasonal rally this year.
Short sellers have covered nearly $30 billion in short positions since the start of the month, with most of the coverage coming from the consumer discretionary, healthcare and financial sectors, according to S3 Partners.
“Shorts are reducing their positions as the market recovers, and they are facing losses in market valuation – and may be trimming their positions in anticipation of the year-end rally,” said Ihor Dusanewski, managing director of S3 Partners.
Meanwhile, the painful declines that have occurred in US stocks and bonds have made both asset classes more attractive to long-term investors, said Liz Ann Saunders, chief investment strategist at Charles Schwab.
“Things look good if you have a one-year horizon, but not without potentially big swings over the next quarter or two,” she said.