The seasonal December celebrations aren't just related to the holidays. Just like kids awaiting their gifts, investors look forward to gains every December in a phenomenon aptly known as the “Santa Claus Rally.”
Santa Claus aside, stocks do tend to outperform in the final month of the year, per empirical evidence. On average, the S&P 500 Index ($SPX) has risen 1.4% in December since 1950– with the returns skewed in the back half of the month. The odds are stacked in favor of bulls, as the S&P 500 has also closed with gains 74% of the time in December.
U.S. Stocks Found a Strong Footing in November
Over the last few months, monthly seasonality trends have played out to near-textbook perfection. For instance, September held on to its reputation as the worst month for stocks, while November turned out to be the best month of the year, with both the Dow Jones Industrial Average ($DOWI) and S&P 500 rising almost 9% each during the month.
In between those two big directional moves, October was quite volatile - as it has been historically - and the S&P 500 officially entered correction territory during the month, having fallen more than 10% from the 2023 highs.
December started on a good note for U.S. stocks, considering the S&P 500 rose to a new record high on the first day of the month. Markets have since looked shaky, and closed in the red for three consecutive days. This brings us to the key question: will there be a Santa Claus rally in 2023, or will traders have to be content with the November fireworks, where the Nasdaq Composite ($NASX) registered double-digit returns? Let’s explore.
To begin with, and as we noted in our previous analysis, the stage was set for U.S. stocks to rally in November, considering the continued slowdown in inflation and attractive equity valuations - which created a compelling case for a rebound.
Will There Be a Santa Claus Rally in 2023?
I believe that U.S. stocks might close higher in December. While there could be some weakness in the first half, stocks should eventually recover in the back half of the month.
Notably, U.S. stock market valuations still look reasonable, with the 12-month forward price-to-earnings ratio of 18.7x arriving in line with the five-year average. The multiples are, however, higher than the 10-year average of 17.6x.
What Factors Should Investors Watch Out for This December?
Investors should watch out for several events and data points in December, which will ultimately set the direction for stocks. These include:
- Inflation data: When we entered 2023, the annualized CPI was running in the mid-6% range, and eventually bottomed at 3.1% in June. In October, the annualized CPI was 3.2%, while prices were unchanged on a monthly basis. Nonetheless, U.S. inflation has moderated to a great extent, even if it is still not yet in the Fed's target range. The inflation reading for November will be key, as it arrives just ahead of the Fed's December meeting. Also, keep an eye on energy prices, as the recent sell-off in oil and gas prices has also played a part in taming inflation.
- Fed meeting and commentary: The FOMC’s December meeting is scheduled to take place between Dec. 12-13. While market participants almost unanimously expect the central bank to keep rates steady, traders will listen carefully for Fed Chair Jerome Powell’s comments on the path of interest rates. Just about a week ago, Powell described rate cut speculation as “premature.” However, this being the last meeting of the year, Powell might talk about the possibility of rate cuts in 2024. Traders are meanwhile quite unanimous that Fed fund rates at the end of next year would be below what they currently are.
- U.S. economic growth and jobs data: U.S. economic growth has been quite resilient, despite multiple economists calling for a recession. However, the ADP report showed that private payrolls rose by 103,000 in November, which was significantly below what economists expected. This December, investors will also closely follow data points related to holiday shopping, which should provide insights into the health of the U.S. consumer - whose propensity to consume hasn’t faltered much, despite all the noise about recession, inflation, and more recently, the resumption of student loan repayments.
All said, while markets might see a flicker of Santa Claus rally in 2023, investors might be more worried about the 2024 outlook, where most analysts are predicting a flattish market and forecast low single-digit returns. J.P. Morgan is the most bearish of the pack, and predicts the S&P 500 closing at 4,200 next year - which implies a downside of roughly 8% from current levels.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
