Analysis: History Says to Expect Strong December for US Equities, Despite Omicron and Fed Concerns

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A man wears a protective mask as he walks past the New York Stock Exchange at the corner of Wall and Broad streets during the coronavirus outbreak in New York, New York, United States, March 13, 2020. REUTERS / Lucas Jackson / File Photo

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December 1 (Reuters) – A pile-up of risk at the end of the year has led some investors to assess whether December will continue its historic trend of strong stock market performance, even as markets face concerns about the Omicron coronavirus variant and a more hawkish Federal Reserve.

November and December were the second and third best months of the year for the S&P 500 since 1950, with the index rising an average of 1.7% and 1.5%, respectively, according to Stock Trader’s Almanac.

This year, November’s gains have derailed in its final days, as concerns over the impact of the new COVID-19 variant on global growth and the Fed’s hawkish turn on Tuesday in the face of soaring inflation left the index with a loss of 0.8% for the month. The S&P 500 is up 21.6% year-to-date and remains near record highs. Read more

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While these risks are unlikely to dissipate anytime soon, stocks can still end the year on a strong note, based on historical performance.

The S&P has returned positive in December 74% of the time since 1928, more than in any other month, according to data from Bespoke Investment Group.

A weaker November only reinforced this trend, though performance over the rest of the year has been strong: this year marks the 10th time that the S&P 500 has fallen in November but is up more than 10% for the year, according to company data. In the previous nine years that this has happened, stocks have ended December with a gain, according to Bespoke.

“Dynamics is definitely a factor,” Bespoke macro strategist George Pearkes told Reuters. “If stocks go up all year and people are underweight and pursue, they might want to increase their positions before the end of the year.”

December’s gains tend to be even more positive when the S&P 500 posted strong first 11 months of the year, according to Ryan Detrick, chief market strategist at LPL Financial.

Since 1950, the index has gained an average 1.7% in December while the S&P 500 has climbed at least 20% the rest of the year, compared to an average of 1.5% for the whole month. of December, according to Detrick.

The markets may have their work cut out for this time around.

The Cboe volatility index, known as the Wall Street fear gauge, hit levels seen in Omicron’s massive selloff last week on Tuesday after Fed Chairman Jerome Powell said in Congress that the central bank would likely discuss ramping up its monthly bond purchases in its next policy. in the face of rampant inflation. Stocks fell on the news, while Treasury bond yields rose. Read more

“With potential policy changes on the horizon, market participants should expect further market volatility in this uncharted territory,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in a recent memo. .

Expectations of a more hawkish Fed are likely to be an unwelcome development for tech stocks whose oversized weighting in the S&P 500 has helped send the index to record highs this year.

Rising Treasury bond yields – which often follow expectations of a more aggressive Fed policy – weaken the attractiveness of stocks for some investors and may weigh even more on high-valued stocks as they threaten to fall. erode the value of their long-term cash flow. flows.

The information technology sector of the S&P 500 is trading at 27.5 times 12-month earnings estimates from its historical average of 20.8 times, according to Refinitiv Datastream.

Investors are also trying to assess the potential severity and severity of the Omicron variant, with Goldman Sachs developing four scenarios on how the strain can spread and its potential impact on global growth.

A “downside” scenario, in which a large wave of infections causes lockdowns, could slow global growth to 2% in the first quarter of 2022, the bank said, 2.5 percentage points below its current forecast .

However, many investors believe stocks will remain dynamic.

“The market has been looking for an excuse to sell for some time,” said Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers Solutions. “Still, high corporate profits and the likelihood of a growing economy should keep the stock market from falling significantly from here.”

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Reporting by Lewis Krauskopf; Additional reports by David Randall and Ira Iosebashvili; Written by Ira Iosebashvili; Editing by Leslie Adler

Our standards: Thomson Reuters Trust Principles.

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