Will November's 'Turkey Rally' Set Stage For December's 'Santa Claus Rally' For Stocks?

November witnessed a remarkable rally in the stock markets, with the S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust SPY, surging 8.9%.

This impressive gain not only snapped a three-month losing streak but also secured its position as the 18th-best monthly performance since 1950, and the fourth-best of the past decade.

The recent bullish surge on Wall Street can be largely attributed to increasing expectations of interest rate cuts by the Federal Reserve in 2024. This optimism is rooted in the ongoing decline in inflation rates, progressively moving towards the Fed’s 2% target.

Historically, December has been another bastion of bullish sentiment. However, the extraordinary gains in November 2023 have led to questions about the continuity of this seasonal trend.

Are We Heading To The ‘Santa Claus Rally’?

As George Smith, a portfolio strategist for LPL Research, revealed, December is the month with the highest proportion of positive returns for the S&P 500, boasting around 74% positive monthly outcomes since 1950.

Chart: LPL Research

In December, stock prices typically see a more pronounced increase in the latter half of the month, averaging a gain of 1.5%, compared to a modest 0.1% in the first half.

This trend has fostered the concept of the “Santa Claus rally,” where investors anticipate a year-end boost in stock prices.

However, the analyst noted that a robust November has historically led to a subdued December, with average returns of 0.83% following a positive November, compared to 2.78% after a negative November.

Maybe Not This Time, But There Are Good Reasons For A Bullish 2024

Smith highlighted that strong monthly returns have historically been a harbinger of continued market strength over the following year.

Instances where the S&P 500 gained over 8% in a month, as it did in November, have typically been followed by an average return of almost 16% in the subsequent year.

Following instances where the S&P 500 ended a three-month losing streak, as it did in November, subsequent one-year returns have significantly exceeded the average.

In the 22 such occasions since 1950, the S&P 500’s year-forward return averaged 17.9%, which is more than double the index’s typical annual gain.

Smith holds a supportive stance for stocks coming into year-end, while he maintains a superior preference for bonds, given attractive relative valuations.

The shifts in “market positioning moving from very bearish to slightly bullish are now slight headwinds to further progress,” Smith said.

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