By David Randall
NEW YORK (Reuters) – Investors hoping for year-end stock market gains after a traditionally punishing year for U.S. equities have made history in December, but many remain skeptical about predicting a rise.
The S&P 500 has gained an average of 1.6% during December, its highest average in any month and more than doubling the 0.7% gain for all months, according to data from investment research firm CFRA. September, meanwhile, is the worst average month for stocks, with an average decline of 0.7%.
Many investors would welcome gains after the S&P 500 Index has fallen about 16% so far this year. Still, the US Federal Reserve’s measures to tighten interest rates to fight inflation have significantly reduced the market.
“December is usually a good time for investors but now they’re stuck because it’s really the focus on rates that will cause the market to go up or down in the short term,” said Sam Stovall, chief strategist investment by CFRA Research.
“The question this year is whether the Fed will raise 75 or 50 basis points, and whether there will be any dovish commentary that suggests the Fed will raise rates once or twice in the next year and then stop,” Stovall said.
December is usually a good month as fund managers buy stocks that have outperformed during the year for so-called “window dressing” of their portfolio while year-end inflows and liquidity are lower during vacation weeks, Stovall said.
At the same time, US stocks have risen during the last five trading days of December and the first two days of January 75% of the time since 1945, according to CFRA, in what is known as the Santa Claus Rally on him. This year, the time period starts on 27 December. The average Santa rally has increased the S&P 500 by 1.3% since 1969, according to the Stock Trader’s Almanac.
This year, however, investors’ focus has largely shifted to the Fed and the pace at which it will continue to raise interest rates as it tries to reduce inflation from near 40-year highs.
“Investors tend to be optimistic going into the new year but this is still a bearish market,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “The old saying is ‘the trend is your friend and don’t fight the trend’, but now it’s ‘the trend is not your friend, so don’t fight the trend’.”
Investors are pricing in a 75% chance that the Fed will raise rates at its Dec. 14 meeting by 50 basis points to a target rate of 4.5%, while the probability of another jumbo 75 basis point move is 24% according to CME’s FedWatch. tool.
Minutes released Wednesday from the Fed’s Nov. 2 meeting showed that a “substantial majority” of policymakers agreed that it would “probably be appropriate soon” to slow the pace of interest rate hikes, although members believe the Fed maintained that there is “significant uncertainty as to the ultimate level” of how rates need to be raised.
Another big rate hike could derail the more than 10% rally in the S&P 500 since early October that has fueled hopes that inflation has peaked from 40-year highs, allowing the Fed to slow down and most aggressive part to pause at the end. rate hiking cycle since the 1970s.
Fed Chairman Jerome Powell, who will speak on November 30, has indicated that the central bank could move to smaller rate hikes next month but also said that rates may need to go higher than the 4.6% appointed by policy makers in September. by next year.
“A sharply reduced valuation for public and private firms is one painful consequence” of higher interest rate costs and the S&P 500 is likely to fall 9% to 3,600 over the next 3 months, Goldman Sachs strategists wrote 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 covering discretionary stocks, health care and consumer financials coming in, according to S3 Partners.
“Short sellers are trimming positions as the market rallies, and incur mark-to-market losses – and possibly trimmed positions in anticipation of the year-end rally,” said Ihor Dusaniwsky, managing director at S3 Partners.
Meanwhile, ambitious double-digit declines in US stocks and bonds have made both asset classes more attractive to long-term investors, said Liz Ann Sonders, Charles Schwab’s chief investment strategist.
“Things look reasonably good if you have a one-year time horizon, but not without potentially significant volatility in the next quarter or two,” she said.
(Reporting by David Randall; editing by Megan Davies and David Gregorio)