The stock market has jumped this fall and its gains could continue in December, which historically is a strong month.
Dow Jones Industrial Average
have all gained in November. The S&P 500 is up almost 12% from its lowest close of the year, hit on Oct. 12. Driving the rally has been a declining rate of inflation, which has spurred bets that the Federal Reserve will slow down its pace of interest rate hikes.
And the market’s recent gains can continue in the short-term.
In fact, December is typically one of the best months of the year for the stock market. The average move for the S&P 500 in December is a gain of about 1.7% since 1928, according to Dow Jones market data, making December the third- best month of the year. The index has risen in just over 70% of Decembers.
The end of the year is usually when people fund their retirement accounts, so new money is rushing into the market, pushing prices higher. The December rally is often referred to as the “Santa rally.”
“The index [S&P 500] is also more likely to post a net gain during the post-Thanksgiving period, rallying 70% of the last 80 years,” wrote Chris Larkin, managing director of trading at ETrade.
Even so, there are a few obstacles that could get in the way of a year-end rally. If the year over year gain for the consumer price index in November doesn’t show a meaningful drop from the 7.7% October result, markets will assume a slightly more aggressive path of rate hikes for the Fed. And the Fed could also accompany a smaller rate hike in December with commentary alluding to still-high rates remaining in place for some time.
Those views are fairly pessimistic, though. The market may well be correct that inflation will keep declining—it has already begun dropping. And if the Fed does deliver a smaller rate hike—an increase of half a percentage point rather than three quarters—that would validate the market’s thesis that the central bank wants to be careful not to damage demand too much.
Meanwhile, the market is already taking a breather as it eyes these risks, with all three indexes in the red Monday.
At some point the market rally will pause—and maybe it Is already doing so this week. But traders are aware that more gains are likely for the next month or so.
Write to Jacob Sonenshine at email@example.com