Dec 25, 2023: As 2023 concludes with robust gains, Wall Street anticipates the fabled ‘Santa Claus Rally’ to propel markets to new highs.
The S&P 500, soaring over 4% in December and marking a 24% increase for the year, stands merely 1% shy of achieving an all-time peak. This momentum positions the benchmark index for an eighth consecutive positive week.
Drawing from historical trends, the ‘Santa Claus Rally’ typically bolsters stocks at year-end. Data from the Stock Trader’s Almanac since 1969 reveals the S&P 500’s average 1.3% gain in the final days of December and early January. These gains are often attributed to various factors, including pre-new year buying post tax-related sales and a general sense of optimism during the holiday season.
This year, optimism prevails. The Federal Reserve’s unexpected shift in December signaled the possible conclusion of its significant monetary tightening and predicted rate cuts into 2024. This dovish turn follows signs of moderating inflation, affirmed by Friday’s data indicating a further slowdown in annual U.S. inflation measured by the personal consumption expenditures (PCE) price index, dipping below 3% in November.
“The Fed’s pivot to a more dovish stance will likely persist,” stated Angelo Kourkafas, senior investment strategist at Edward Jones. “This continues to bolster sentiment and market support, a trend unlikely to alter next week.”
Investor appetite for stocks remains hearty. BofA Global Research reported the largest weekly net inflow of $6.4 billion in U.S. equities among BofA clients, the highest since October 2022. Additionally, Vanda Research noted a notable surge in retail investor buying over the past four to six weeks, redirecting purchases to riskier assets following a pursuit of higher yields in prior months.
Ned Davis Research recommended a further 5% shift from cash to equities in portfolio models, relying on stock market breadth indicators. However, thinner trading volumes during the holiday period make stocks susceptible to unexpected news or substantial trades, as observed in a recent abrupt downturn of the S&P 500.
Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, emphasized the potential for a ‘fear of missing out’ (FOMO) surge next week, as investors holding significant cash positions may seek entry into the market amidst the ongoing equity rally.
Mahn cautioned that while markets may seem somewhat overextended due to the recent rally, the possibility of an incremental climb remains feasible, driven by the ‘FOMO’ trade.