Wall Street anticipates 'Santa Rally' as 2023 nears record closure

Wall Street is gearing up for the much-anticipated 'Santa Claus Rally' as the year concludes with robust gains, propelling the S&P 500 to nearly 1 per cent of a historic high. The S&P 500 has already seen a 4 per cent surge in December, contributing to an impressive 24 per cent gain for the year, setting the stage for what could be its eighth consecutive positive week.

Historically, the final days of December and the initial days of January, known as the "Santa Claus Rally," have witnessed strong market performances. According to data from the Stock Trader's Almanac dating back to 1969, the S&P 500 has, on average, gained 1.3 per cent during this period. Various factors, including buying before the new year due to tax-related sales and a general sense of holiday optimism, have been attributed to this seasonal upswing.

This year's optimism is bolstered by the Federal Reserve's unexpected dovish pivot, signaling the likely conclusion of historic monetary policy tightening and anticipating rate cuts into 2024. The move follows indications of moderating inflation, as highlighted by recent data revealing a further slowdown in US inflation to below 3 per cent in November, as measured by the personal consumption expenditures (PCE) price index.

"The narrative will continue to be about the Fed making a dovish pivot," remarked Angelo Kourkafas, senior investment strategist at Edward Jones. "That provides support on markets and sentiment and is unlikely to change next week."

Investors have displayed a strong appetite for stocks, with BofA clients registering the largest weekly net inflow since October 2022, amounting to $6.4 billion in US equities. Additionally, retail investors have shown increased buying activity over the past four to six weeks, redirecting their focus toward riskier securities.

In response to market conditions, Ned Davis Research has recommended a further 5 per cent shift from cash to equities, reaching the maximum equity allocation in its portfolio models. However, it's worth noting that thin trading volumes are expected for the remainder of the year due to holiday breaks, rendering stocks particularly sensitive to unforeseen news or large trades.

While some caution prevails, with an acknowledgment that the market may have surged ahead of itself, there is a possibility of a slight upward movement driven by the "fear of missing out" (FOMO) trade. Kevin Mahn, President and Chief Investment Officer at Hennion & Walsh Asset Management, highlighted the potential for investors in cash to join the market, contributing to a higher trajectory.

(With Reuters inputs.)