When November wrapped up, the stock market said goodbye to the best month—so far—of a good year. That understandably leaves investors to wonder whether there’s is enough juice (or milk and cookies) left for a Santa rally. There’s good news for those who want to believe.
The S&P 500 closed the month up just shy of 9%, while the Nasdaq Composite gained almost 11%. That’s a swift reversal from the third-quarter selloff, but follows the pattern that has held in 2023, with Big Tech leading the way.
And barring any huge disruption, even a lackluster December won’t derail this year’s winning streak. So far in 2023, through Thursday’s close, the S&P 500 is up within a fraction of 19% and the Nasdaq has gained nearly double that.
There is hope that December can still add to the year’s gains. Putting aside down years for the market, the month historically tends to be a good one for investors.
That’s especially true because the S&P 500 tends to hang onto gains after big consecutive up weeks. Plus, at this point, there seems little fundamentally that would cause Big Tech leaders to falter—at least in the very near term. Technical indicators also support gains to close the year.
“While there is certainly no perfect historical comparison that can be used to lay out the road map for stocks in the future, we are confident that the secular bull market can continue to roll on, especially given the current fundamental states of U.S. stocks and the economy,” wrote Brian Belski, BMO Capital Markets’ chief investment strategist.
A soft landing for the economy appears baked into the market at this point so there’s very little wiggle room to absorb data that don’t dovetail with this scenario.
Nonetheless, even those predicting the economy will deteriorate next year don’t believe a recession will keep stocks down for long, and there is historical precedent for that thinking.
Still, the Federal Reserve will keep driving the market’s moves in the new year, as it has this year.
Fed speakers are sounding more dovish in the past week, and yields keep drifting lower; lower yields in general can be see as less of a headwind for stocks.
Any indication—by the Federal Open Market Committee at its December meeting next week—that interest rates could come down for any reason other than a recession would be one less thing for the market to worry about.
The central bank’s own balance sheet is an argument against a severe recession, as Sevens Report’s President Tom Essay writes, given that its nearly doubled from $4 trillion prepandemic, to $7.8 trillion: “That massive liquidity boost (even after quantitative tightening) provides a liquidity buffer that should help prevent a deeper economic contraction.”
Still, some investors are jittery that the increasing odds of rate cuts ahead have come hand-in-hand with evidence of a hard economic landing versus a soft one.
At the moment, the market thinks two rate cuts are probably coming next year—in the first and second quarters. If that does happen, it isn’t the kind of aggressive trimming expected in the face of a looming recession—particularly because it would leave the fed-funds rate at or close to 5%.
“This is no one’s idea of accommodative monetary policy, the sort of rate outlook one would expect if a downturn is forming right now,” writes DataTrek Co-Founder Nicholas Colas. “Assuming modest rate cuts in the first half of 2024 may or may not be wise, but they are certainly not a signal that a recession is just around the corner…The bottom line here is that lower interest rates should be helpful, not harmful, to equity valuations.”
Of course, there’s no guarantee that the trajectory of rates will play out this way. UBS Chief Investment Officer Americas Solita Marcelli thinks rates probably won’t come down until summer, and data could alter rate expectations—and the direction of stocks in December and beyond.
That said, UBS’s concerns are more with schedule than substance: “We agree with the market’s assessment that U.S. growth, inflation, and rates will all head lower next year—but our view on the timing and size of U.S. rate cuts differs to the market, with potential for uncertainty and market volatility…In equities, quality companies with strong balance sheets and high profitability, including those in the technology sector, should be best positioned to generate earnings in an environment of weaker growth.”
If it means more gains for tech stocks and the market as a whole, investors will more than likely willing to endure some lumps—coal or otherwise.
Write to Teresa Rivas at teresa.rivas@barrons.com
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