According to a report by Reuters, as the U.S. stock market concludes a tumultuous year with significant gains, investors are focusing on factors that could influence equities in the final weeks of 2023. These include tax loss selling and the anticipated Santa Claus rally.
Central to market dynamics is the Federal Reserve’s monetary policy. Signs of slowing economic growth have spurred speculation that the Fed might reduce rates as soon as the first half of 2024. This anticipation has already fueled a rally, with the S&P 500 climbing 19.6% year-to-date and reaching a new closing high for the year.
Seasonal trends have also played a notable role in 2023’s market behavior. September, typically a weak month for stocks, saw the S&P 500 drop nearly 5%. In contrast, November, usually strong, witnessed nearly a 9% gain in the index. “We’ve had a solid year, but history shows that December can sometimes move to its own beat,” commented Sam Stovall, chief investment strategist at CFRA Research in New York.
Investors are now looking ahead to the U.S. employment data scheduled for release on December 8 for indications of continuing economic stabilization.
Historically, December has been a strong month for the S&P 500, rising on average 1.54% since 1945 and typically posting gains 77% of the time. LPL Financial’s research suggests that the latter half of December usually outperforms the first, often resulting in so-called Santa Claus rallies.
However, stocks that have underperformed may experience further pressure in December due to tax loss selling, as investors offload them to secure write-offs. These stocks may later rebound, as noted by analysts, with BofA Global Research indicating that since 1986, stocks down 10% or more by end-October have outperformed the S&P 500 by 1.9% over the next three months.
With the market’s advance being narrowly concentrated in a few megacap stocks like Apple, Tesla, and Nvidia, many portfolios still have underperforming stocks. The equal-weighted S&P 500, not skewed by big tech and growth stocks, has risen about 6% in 2023.
Investor over-exuberance post-November’s rally is a concern for some analysts. Notable jumps in speculative stocks, such as Roku, Coinbase Global, and Cathie Wood’s ARK Innovation Fund, have caught attention.
Michael Hartnett, chief investment strategist at BofA Global Research, indicated that their contrarian Bull & Bear indicator had moved out of the “buy” zone for the first time since mid-October, suggesting caution for those considering chasing the rally.