Wall St Week Ahead Stocks typically rally in December, investors tread cautiously this year

Wall St Week Ahead Stocks typically rally in December, investors tread cautiously this year

NEW YORK, Nov 25 (Reuters) – Investors hoping the end of the year will bring stock market gains after a trying year have history on their side as U.S. stocks traditionally rally in December, but many remain skeptical of the forecasts of a rise.

The S&P 500 gained an average of 1.6% in December, the highest average of any month and more than double the 0.7% gain of any month, according to data from investment research firm CFRA. . September, meanwhile, was the worst month on average for stocks, with an average decline of 0.7%.

The gains would be welcomed by many investors after seeing the S&P 500 Index (.SPX) fall around 16% so far this year. Still, moves by the US Federal Reserve to aggressively tighten interest rates to fight inflation weighed on the market.

“December is generally a good time for investors, but right now they’re stuck because it’s really the focus on rates that will drive the market up or down in the short term,” said Sam Stovall, strategist in chief investment officer at CFRA Research.

“The question this year is whether the Fed will hike 75 or 50 basis points, and if there will be dovish commentary suggesting the Fed will raise rates one or two more times next year, then the will stop,” Stovall said.

December is usually a good month as fund managers buy stocks that have outperformed over the year for the so-called “window dressing” of their portfolios while there are late-month inflows. year and lower liquidity during holiday-shortened weeks, Stovall said.

Meanwhile, U.S. stocks have risen in the last five trading days of December and the first two days of January 75% of the time since 1945, according to the CFRA, during a so-called Santa Claus rally. This year, the period begins on December 27. The average Santa Claus rally has lifted the S&P 500 1.3% since 1969, according to the Stock Trader’s Almanac.

This year, however, investors’ attention has largely shifted to the Fed and the pace at which it will continue to raise interest rates as it attempts to bring inflation down by nearly 40 years.

“Investors tend to be optimistic at the start of the new year, but it’s still the Fed market,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “The old saying goes, ‘the trend is your friend, don’t fight the Fed’, but now it’s ‘the Fed isn’t your friend, so don’t fight the trend.’

Investors are pricing in a 75% chance of the Fed raising rates at its Dec. 14 meeting by 50 basis points to a target rate of 4.5%, while the chance of another giant move of 75 points basis is 24% according to FedWatch’s CME tool.

Minutes released Wednesday of the Fed’s Nov. 2 meeting showed a “substantial majority” of policymakers agreed that it would “probably soon be appropriate” to slow the pace of interest rate hikes.” , although Fed members say there is “significant uncertainty about the ultimate level” of how rates should rise.

Another outsized rate hike could hamper the S&P 500’s more than 10% rise since early October, which has been fueled in large part by hopes that inflation has peaked from 40-year highs, allowing the Fed to slow down and eventually pause its most aggressive policy. hiking cycle since the 1970s.

Fed Chairman Jerome Powell, who will speak Nov. 30, signaled that the central bank may move to lower rate hikes next month, but also said rates may ultimately have to rise above 4, 6% that policymakers thought in September would be needed. by next year.

“Sharp declines in public and private company valuations are a painful consequence” of rising interest rates and will likely mean the S&P 500 will fall 9% to 3,600 over the next 3 months, the strategists wrote from Goldman Sachs in a note on Monday.

Still, 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 the largest coverage being consumer discretionary, healthcare and financials stocks, according to S3 Partners.

“Short sellers reduce their positions as the market recovers, and they experience market value losses – and possibly reduction positions in anticipation of a year-end rally,” said Ihor Dusaniwsky, CEO of S3 Partners.

Meanwhile, painful double-digit declines in U.S. stocks and bonds have made both asset classes more attractive to long-term investors, said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“Things look pretty decent if you have a one-year time horizon, but not without potentially significant volatility over the next quarter or two quarters,” she said.

Reporting by David Randall; edited by Megan Davies and David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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