Early Arrival of the Christmas Rally in U.S. Stocks
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As of December 22, U.Sstocks have risen for eight consecutive weeksWhile the "Christmas rally" is a familiar phenomenon, the intensity of this surge was unexpected, largely fueled by a surprising signal from the Federal Reserve suggesting interest rate cuts ahead.
On December 20, a Wednesday, all three major U.Sstock indices fell by over 1%, breaking a prolonged winning streakThis pullback, which lacked any significant data or events driving it, could mainly be attributed to profit-taking from investors, serving to correct the recent overbought conditionsHowever, by Thursday, the indices rebounded with the S&P 500 gaining more than 1% to close at 4,746 points
Despite the recent comments from Fed officials attempting to temper rate cut expectations, the stock market remained unperturbed, with participants pricing in a 140 basis-point cut by next year, which significantly increased the likelihood of cuts in the first quarter.
In a meeting on December 14, the Federal Reserve delivered what many termed a "Christmas gift" to investorsThe bank decided to keep interest rates within the 5.25%-5.5% range, marking the third consecutive pause in rate hikes, which aligned with market expectationsNotably, the accompanying statement emphasized a significant easing of inflation over the past year and noted that "the pace of economic growth has slowed," suggesting that the rate hike cycle may be nearing its end—something not anticipated by the market.
The Fed's dot plot revealed that 17 out of 19 committee members support rate cuts next year, with no predictions for additional rate hikes
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The median interest rate forecast for the end of next year has dropped from 5.1% to 4.6%, indicating a potential for three cuts next year, which surpasses earlier forecasts of two cuts made in September and aligns closely with current market expectations.
As a result, the anticipation for rate cuts has prompted an early arrival of the "Christmas rally." This term usually refers to a historical trend where the S&P 500 typically experiences positive momentum during the last five trading days of the year and the first two trading days of the following year, a trend highlighted since 1970.
According to Dow Jones Market Data, since 1950, the S&P 500 has averaged a 1.3% gain during this seven-day window, with a striking success rate of 78%. By mid-December, the Dow, S&P 500, and Nasdaq indices had recorded cumulative gains of 13%, 23%, and 40%, respectively
The Nasdaq 100 even surpassed a 50% increase this year, and now, with clear signals of anticipated rate cuts from the Fed, the market's excitement for this year's Christmas rally has reached new heights.
Overall, U.Scompanies and their ability to innovate continue to outpace many global marketsSectors such as technology, communications, and healthcare are heavily weighted in the S&P 500 compared to other regionsThe modern information technology sector alone comprises 28% of the S&P 500, while Europe represents a mere 6%. This discrepancy likely explains why the S&P can maintain higher trading values compared to other markets.
In addition, the impressive rise of the "Magnificent Seven"—the major tech giants in the U.S.—has sustained the stock market's performance throughout 2023. Despite their massive market caps and relatively high valuations, institutional investors find it challenging to short these stocks, a stark contrast to the dot-com bubble of the late 1990s
Today’s tech giants are likened to "cash cows," benefiting from the influx of funds into large-cap indices.
After achieving eight weeks of consecutive gains, momentum in the market seems undiminished.
The S&P 500 is poised to reach new historical highs.
Following a significant surge last week, the S&P 500 index has achieved its seventh consecutive weekly gain, and now the eighth week is underway, a rare occurrence in historical contextWhen we observe such unusual price movements, we often analyze what they could imply for future market behavior within the context of historical data.
Since the establishment of the S&P 500 in 1923, there have only been 40 instances of seven or more consecutive weeks of gains, occurring approximately once every 2.5 years
These occurrences typically take place during mid-bull market phases, with very few appearing distinctly at market tops or bottoms.
Historically speaking, the probability indicates that such streaks are nearing an end; approximately 80% of instances after seven consecutive weekly rises fail to extend to ten weeksOnly a select few have achieved gains lasting beyond ten weeks.
The longest streak for the S&P 500 was 14 weeks, recorded in 1927 and 1957. Perhaps of greater interest to readers is that the historical returns of the S&P 500 after seven consecutive weeks of gains tend to be quite generousAverage returns in the following 4, 13, and 52 weeks were +1.5% (compared to an overall average return of 0.6% for four weeks), +4.1% (against an average of 2.1% for 13 weeks), and +13% (where the general average is 8.4% for 52 weeks).
Moreover, following seven weeks of consecutive gains, the S&P 500 index exhibited above-average positive trends in the following month, quarter, and year
In 73% of instances, it has risen after four weeks; 83% of the time after 13 weeks (compared to an overall average of 64%); and 83% after 52 weeks (with an overall average of 69%).
The next steps are uncertain, and time will reveal how the current rally unfoldsHowever, a tendency for a streak to be interrupted does not necessarily signal a bearish outlook for the index since historical data of seven-plus weeks of gains tends to point towards bullish returns in the month, quarter, and year ahead.
This trend shows a clear bullish signal across multiple time frames, yet the S&P 500 index has reached overbought territory based on the 14-day Relative Strength Index (RSI), suggesting that a pullback or consolidation may occur as we enter the liquidity-crunched holiday season.
In the short term, as long as the S&P 500 index stays above the previous resistance level that has turned into support at 4,600, the bullish momentum is likely to continue, potentially pushing the index toward historical highs around 4,820. It is only a breach below 4,600 that would jeopardize the current bullish stance.
(The views expressed herein are solely those of the author and do not represent the position of this publication
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