As the year draws to a year and U.S. stocks rest on healthy gains, investors are keeping a watch out for events that can influence stocks in the final weeks of 2023, such as tax loss selling and the infamous Santa Claus surge.
The Federal Reserve’s anticipated monetary policy trajectory will probably remain the primary driver of markets. The S&P 500 has risen 19.6% year to date, reaching a new closing high for the year on Friday, as speculation that the US central bank may start reducing rates as early as the first half of 2024 has been stoked by signs of slowing economic growth.
Seasonal patterns, however, have been especially robust this year. September is usually the worst month for equities, and this year the S&P 500 dropped by about 5%. In October, a month known for its volatility, stocks saw extreme swings. November was, traditionally, a solid month for the S&P 500, gaining close to 9%.
“December can occasionally move to its own beat, but we’ve had a solid year,” stated Sam Stovall, chief financial analyst at CFRA Research in New York.
Investors will be observing next week’s U.S. employment data, which is scheduled for release on December 8, to see whether economic growth is still plateauing.
According to CFRA, the S&P 500 has had its second-best month overall, with the index gaining an average of 1.54% for the month since 1945. According to the firm’s research, it is also the month most likely to show a rise, with the index climbing 77% of the time.
December typically has a stronger second half than first, according to research from LPL Financial. According to LPL’s examination of market movements dating back to 1950, the S&P 500 has gained an average of 1.4% in the second half of December during so-called Santa Claus rallies, compared with a gain of 0.1% in the first half.
However, tax loss selling in December may put more pressure on underperforming stocks as investors sell losers to lock in write-offs before year-end. Analysts predicted that some of those shares may rise later in the month and into January if past performance is any indication, as investors gravitate back towards inexpensive brands.
According to BofA Global Research, since 1986, companies that fell 10% or more between January and the end of October have outperformed the S&P 500 by an average of 1.9% during the following three months. In a study published in late October, BofA mentioned that among the equities the bank suggests purchasing for a tax-related rebound are PayPal Holdings, CVS Health, and Kraft Heinz Co.
According to Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute, “the market advance has been extraordinarily narrow this year, and there’s reason to believe that some sectors and stocks will really take it on the chin until they get some relief in January.”
There will probably be a lot of underperforming equities in investing portfolios even with the market’s significant year-to-date gain. Data from S&P Dow Jones Indices revealed that a group of megacap firms, like Apple, Tesla, and Nvidia, had an excessive weighting in the index and have contributed about 72% of the S&P 500’s increase.
Numerous additional names have not been used: The equal-weighted S&P 500 is up around 6% in 2023, with its performance unaffected by growth and large tech firms.
Some fear that after November’s significant gain, which sparked enormous swings in some of the market’s most speculative names, investor over-exuberance may have already set in.
For example, in November, streaming service provider Roku had a 75% increase, cryptocurrency business Coinbase Global saw a 62% increase, and Cathie Wood’s ARK Innovation Fund saw a 31% gain—its biggest month-over-month return in the previous five years.
Chief investment strategist Michael Hartnett of BofA Global Research said in a note on Friday that the company’s contrarian Bull & Bear indicator, which evaluates things like bond flows, hedge fund positions, and stock flows, has left the “buy” zone for the first time since mid-October.