By David Randall
NEW YORK (Reuters) – As the year comes to a close, U.S. stocks have experienced major gains. Investors are now focusing on various factors that could impact equities in the remaining weeks of 2023, including tax loss selling and the Santa Claus rally.
The anticipated trajectory of the Federal Reserve’s monetary policy is expected to remain a key driver for stocks. Signs of slowing economic growth have led to speculations that the central bank could initiate rate cuts as early as the first half of 2024. This has caused a rally, with the S&P 500 up 19.6% year-to-date, reaching a fresh closing high for the year on Friday.
This year, seasonal trends have been notably strong. While historically September and October are weak and volatile months for stocks, November saw a nearly 9% gain for the S&P 500, historically a strong month for the index.
“We’ve had a solid year, but history shows that December can sometimes move to its own beat,” said Sam Stovall, chief investment strategist at CFRA Research in New York.
Next week, investors will closely monitor the U.S. employment data, set to be released on Dec. 8, to gauge the ongoing economic growth.
December has been the second-best month for the S&P 500, averaging a 1.54% increase for the month since 1945. Additionally, it has been the month most likely to post a gain, with the index rising 77% of the time, according to CFRA data.
Research from LPL Financial indicates that the second half of December tends to outperform the first part. The S&P 500 has seen an average increase of 1.4% in the second half of December during Santa Claus rallies.
However, stocks that have not performed well may face pressure from tax loss selling, as investors aim to dispose of losers to secure write-offs before year-end. Based on historical trends, some of these shares may rebound later in the month and into January as investors return to undervalued names.
According to BofA Global Research, stocks that experienced a 10% or more decline between January and the end of October between 1986 and now have outperformed the S&P 500 by an average of 1.9% over the next three months. PayPal Holdings, CVS Health, and Kraft Heinz Co are among the stocks recommended for a tax-related bounce.
Despite the significant rise in the market, investment portfolios are likely to have several underperforming stocks. Data from S&P Dow Jones Indices shows that nearly 72% of the S&P 500’s gain was attributed to a cluster of megacap stocks, leaving many other names struggling.
Some experts worry about potential investor over-exuberance following November’s substantial rally, especially with huge moves in more speculative market names.
Streaming service company Roku, cryptocurrency firm Coinbase Global, and Cathie Wood’s ARK Innovation Fund notably surged in November, signaling a potential rise in investor enthusiasm.
Michael Hartnett, chief investment strategist at BofA Global Research, has noted that the firm’s contrarian Bull & Bear indicator had moved out of the “buy” zone for the first time since mid-October.
“If you caught it, no need to chase it,” he wrote of the rally.
(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)
