December Dilemma: As U.S. stocks bask in robust gains to cap off a tumultuous year, investors are scrutinizing potential influencers for equities in the remaining weeks of 2023. Factors like tax loss selling and the anticipated Santa Claus rally loom large on the horizon.
The pivotal driver for stocks remains tethered to the anticipated path of the Federal Reserve‘s monetary policy. Signals of cooling economic growth have fueled speculations that the U.S. central bank might initiate rate cuts in the first half of 2024, triggering a rally that propelled the S&P 500 (.SPX) to a year-to-date surge of 19.6%, achieving a fresh closing high for the year.
While historical patterns often guide market expectations, this year has seen noteworthy deviations from the norm. Notably, September, traditionally a weak month for stocks, witnessed a nearly 5% dip in the S&P 500. October, renowned for its volatility, featured wild market swings. However, November defied historical odds, presenting a robust 9% gain for the S&P 500, typically a strong month for the index.
Sam Stovall, Chief Investment Strategist at CFRA Research, highlighted the historical patterns but cautioned that December can sometimes chart its unique course. Investors are eyeing the upcoming U.S. employment data on December 8 to gauge the trajectory of economic growth.
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December, traditionally the second-best month for the S&P 500, boasts an average gain of 1.54% since 1945, with a 77% likelihood of posting a gain, according to CFRA. LPL Financial’s research emphasizes that the second half of December typically outshines the first, showcasing an average gain of 1.4% during Santa Claus rallies, compared to a mere 0.1% in the first half.
The looming shadow of tax loss selling adds a layer of complexity to December dynamics. Struggling stocks might face additional pressure as investors shed losers to capitalize on year-end write-offs. However, history suggests that some of these underperformers could experience a rebound later in December and into January as investors return to undervalued names.
While the market has witnessed substantial year-to-date gains, the rise has been notably narrow, with a handful of megacap stocks, including Apple, Tesla, and Nvidia, driving nearly 72% of the S&P 500’s ascent, leaving many other names lagging. Concerns about over-exuberance have emerged, particularly after November’s significant rally, which propelled speculative assets like Roku, Coinbase, and ARK Innovation Fund to substantial gains.
Michael Hartnett, Chief Investment Strategist at BofA Global Research, sounded a note of caution, noting that their Bull & Bear indicator had shifted out of the “buy” zone for the first time since mid-October. As the year draws to a close, investors are navigating a landscape of potential opportunities and risks, where historical patterns intersect with current market dynamics.