Major Factors Influencing The Stock Market As 2023 Comes To A Close
As the year approaches its end, U.S. investors are closely watching various factors that could affect the stock market in the upcoming weeks. Key influencers include tax loss selling and the possibility of a “Santa Claus rally.”
Evidence of slowing economic growth has led to speculation that the Federal Reserve may start cutting rates as early as the first half of 2024. This anticipation has been driving the S&P 500 upwards, with a 19.6% year-to-date increase and a fresh closing high for the year on Friday.
Seasonal trends have also played a significant role this year, with the S&P 500 experiencing historically strong months such as November, while also surviving typically weak months like September.
Analysts at CFRA Research stated that although December has been generally positive for the S&P 500, historical data shows that it can often move to its unique rhythm. They emphasized the importance of observing U.S. employment data, due to be released on December 8, to gauge the trajectory of economic growth.
The market advance for 2023 has primarily been supported by mega-cap stocks such as Apple, Tesla, and Nvidia, which have significantly impacted the S&P 500. However, the equal-weighted S&P 500, which discounts the influence of big tech and growth stocks, has only seen a 6% increase in 2023.
Investors are expected to engage in tax loss selling, a practice where they sell underperforming stocks to crystallize losses for tax write-offs before the year ends. This trend may lead to additional pressure on stocks that have underperformed this year.
However, stocks that have experienced a significant decline through the year may also see an upward bounce in December and January. According to BofA Global Research, historically, stocks that were down by 10% or more between January and October have outperformed the S&P 500 by an average of 1.9% over the next three months. PayPal Holdings, CVS Health, and Kraft Heinz Co are among the stocks mentioned for a potential tax-related bounce.
Some market strategists have cautioned about the potential for over-exuberance in the wake of the November rally, which saw enormous gains in high-flying, speculative names such as Roku, Coinbase Global, and Cathie Wood’s ARK Innovation Fund.
Contrarian indicators from BofA Global Research have also signaled a potential shift in sentiment, moving out of the “buy” zone for the first time since mid-October. Michael Hartnett, chief investment strategist at BofA Global Research, advised against chasing the rally, suggesting that caution may be warranted.
All eyes will be on December’s developments, as investors prepare for the potential year-end tax loss selling, a Santa Claus rally, and ongoing monetary policy discussions from the Federal Reserve.
Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang