Thanksgiving may be over, but investors still have reason to be thankful—a Santa Claus rally is set to begin.
Stocks have capped another upbeat week, with the
Dow Jones Industrial Average
advancing 1.3%, the
S&P 500 index
gaining 1%, and the
Nasdaq Composite
up 0.9% in a stretch of holiday-shortened trading.
The stock market seems to have some real momentum behind it, momentum that could turn a Thanksgiving upturn into a full-blown end-of-year rally. Part of this is just simple seasonality: Since 1950, the S&P 500 has risen 70% of the time from Thanksgiving through New Year’s Eve, for an average gain of 1.7%.
The momentum is even greater when the market has a strong run heading into Turkey Day, and with the S&P 500 up 8.1% in the month leading up to the holiday—its best stretch since 1999, when the index went on to gain another 3.7% through year end—we’d say that qualifies.
But there’s more to a potential rally than purely technical matters. Jessica Rabe, co-founder of DataTrek Research, points to the end of the Federal Reserve’s tightening cycle. The central bank last raised interest rates in July, and the market is coming around to the idea that it was the last increase of this rate-hiking campaign.
That has generally been good news for the S&P 500, which has gained 17% on average in the year after the last increase in cycles ended in 1995, 2000, 2006, and 2018, Rabe found. With the S&P 500 mostly unchanged since the Fed’s last interest-rate hike in July, it suggests the index has a lot of making up to do.
It isn’t just the end of rate hikes that bodes well for the market—it’s also the possibility that cuts will start soon. There’s a 25% chance that the Fed will cut rates by its March 2024 meeting, with greater than 50% odds that rates fall by May, according to the CME FedWatch Tool. That’s right in line with what has happened in the past: The central bank has started lowering rates nine months after its final hike on average, which would put this one at the policy meeting that ends on May 1.
“Markets know their history,” writes Rabe. “This is when fed-funds futures start giving majority odds of a rate reduction.”
A rate cut could be problematic if the Fed were acting to stave off a recession, but the good news is that the U.S. economy looks to be in solid shape. The November S&P Global Flash U.S. Composite PMI, a gauge of economic activity in the manufacturing and services sector, came in at 50.7—anything above 50 means economic activity is increasing—evidence that economic growth is in a sweet spot while inflation continues to fall.
Too early for more turkey?
Write to Jack Denton at jack.denton@barrons.com
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