Stocks generally soar in December, investors are cautious this year

By David Randall

NEW YORK (Reuters) – Investors hoping the end of the year brings gains to stocks after a tough year have history on their side, as US stocks traditionally rally during the month of December, but many remain skeptical of the forecast. of a rise.

The S&P 500 gained an average of 1.6% in December, the highest average of any month and more than double all-month gains of 0.7%, according to data from investment research firm CFRA. September, meanwhile, is the worst month on average for stocks, with an average decline of 0.7%.

The gains would be welcomed by many investors after seeing the S&P 500 index fall about 16% so far this year. However, weighing on the market were the US Federal Reserve’s actions to aggressively tighten interest rates to fight inflation.

“December is usually a good time for investors, but right now they’re stuck because it’s really the focus on rates that will make the market go up or down in the short term,” said Sam Stovall, chief investment strategist at CFRA Research.

“The question this year is whether the Fed will hike 75 or 50 basis points and whether there will be dovish comments suggesting the Fed will hike rates once or twice next year and then shut down,” Stovall said.

December is typically a good month as fund managers buy stocks that have outperformed over the year for the so-called “showcase” of their portfolios, while there are year-end inflows and lower liquidity during the shortened holiday 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 a so-called Santa Claus Rally. This year, the time period starts on December 27th. Santa’s average rally has lifted the S&P 500 1.3% since 1969, according to the Stock Trader’s Almanac.

This year, however, investor attention has largely shifted to the Fed and the pace at which it will continue to raise interest rates in an effort to bring inflation down from nearly 40-year highs.

“Investors tend to be optimistic in the new year, but this is still the Fed’s 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 Fed,’ but now it’s ‘the Fed is not your friend, so don’t fight the trend.'”

Investors are pricing in a 75% probability that the Fed will hike rates at its Dec. 14 meeting by 50 basis points to a 4.5% target rate, while the probability of another jumbo 75 basis point move is at 24% according to CME’s FedWatch tool.

Minutes released on Wednesday from the Nov. 2 Fed meeting showed that a “substantial majority” of policy makers agreed that “it would probably be appropriate soon” to “slow the pace of interest rate hikes,” although Fed members believe there and “significant uncertainty about the final level” of how rates are to rise.

Another outrageous rate hike could hamper the S&P 500’s more than 10% rally since early October, fueled largely by hopes that inflation has peaked from a 40-year high, allowing the Fed to ease and eventually pause its most aggressive rate-hiking cycle strategy since the 1970s.

Fed Chairman Jerome Powell, due to speak Nov. 30, signaled the central bank could move to small rate hikes next month, but also said rates could eventually have to rise above the 4.6% that i politicians thought it would be necessary in September. within the next year.

“Sharply reduced valuation for public and private companies is a painful consequence” of rising interest rate costs and will likely mean the S&P 500 drops 9% to 3,600 over the next 3 months, Goldman Sachs strategists wrote on Monday in a note.

However, there may be other reasons to hope for another seasonal rally this year.

According to S3 Partners, short sellers have hedged nearly $30 billion in short positions since the start of the month, with the largest coverage coming from consumer discretionary, healthcare and financials.

“Short sellers are trimming positions as the market recovers and incur mark-to-market losses – and possibly trimming positions in anticipation of a year-end rally,” said Ihor Dusaniwsky, chief executive officer of S3 Partners.

Painful double-digit declines in US stocks and bonds, meanwhile, have made both asset classes more attractive to long-term investors, said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“Things are looking pretty decent if you have a one-year time horizon, but not without potentially significant volatility over the next quarter or two,” he said.

(Reporting by David Randall; Editing by Megan Davies and David Gregorio)

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