December has always brought with it a good feeling, and this has historically been the case for stock markets too. Views are split as to the reasons why this boost occurs, but the last month of the year is typically a good time for market bulls. Of course, there’s no doubt this year has already been one for the record books for stock indices. There have been only two months in 2024 in the red for the benchmark US S&P 500 index, April and October. Last week, it recorded its 54th record high for the year. So can this buying carry on into the new year?
Economic data has remained solid with the US consumer particularly resilient. Remember that consumer activity represents nearly 70% of US GDP, so markets have been really supported by this theme. Interest rate cuts by the Fed have also helped as inflation came down much closer to the central bank’s 2% target. Market fears about a hard landing dissipated and policymakers went all in on trying to achieve a soft landing. Indeed, a ‘Goldilocks’ economy, one which is neither too hot nor too cold but just right, has played out so far. Moderate growth and lower inflation allowed for market-friendly monetary policy, even though the odds of further rate cuts have been reined in with the US election result.
Reasons for a traditional Santa Rally
The ‘January Effect’ has been a driver for stocks in the past; that is when traders eagerly buy stocks in December, envisioning a January rally. This behaviour is grounded in the belief that stocks, especially the smaller ones, tend to put on a show at the start of the new year. The festive season between Christmas and New Year often brings a wave of optimism which leads many to buy more stocks with their year-end bonuses, hoping for future gains. Finally, big players like institutional investors and large funds often have to execute year-end portfolio rebalancing, as the calendar flips.
Digging further into the finer details, markets increase in value specifically during the last week of December and into the first two trading days of the new year. Research shows that since 1950, this single seven-day period has produced a positive return for the S&P 500 78.9% of the time. No other similar duration of trading sessions is more likely to be higher.
Characteristics of the current rally
With markets so buoyant already, expectations are high that stocks can crown the year with yet more all-time highs. Bullish momentum is exceptionally strong at present, so new peaks seem like a given, especially as the indices aren’t overbought on a technical basis.
Record levels of corporate buybacks are suppressing volatility and reducing equity drawdown risk. Valuations are high but can remain elevated. Market breadth has also broadened so that the major indices are no longer as heavily reliant on a handful of stocks (the ‘Magnificent Seven’) driving prices higher. That phrase referred to the megacap tech titans which have dominated the stock markets over the last few years.
Economic data may be crucial
Statistically, it is likely that we do see another rally into year end, even though the bull run this year has already been extraordinary. US economic data continues to tick along with the Atlanta Fed GDPNow for the final quarter of 2024 forecast at a very healthy 2.7%. Recent inflation is proving modestly sticky but is not far away from the Fed’s 2% target. Questions around where the neutral rate for interest rates will continue, with most economists reckoning it lies somewhere between 2.5% and 3%.
Key data will be the November monthly non-farm payrolls report which is released on Friday this week. This is then followed by CPI and PPI data the following week, with the FOMC meeting on 18 December. The labour market figures come after the disruptions from hurricanes and strikes in the prior report. This data will be instrumental in setting the scene for policymakers. At present, most officials appear to be in no rush for more monetary easing in the new year, with a heavy emphasis placed on incoming data and the likely impact of Trump’s policies on the economy.