Stocks continue their upward trend, potentially transforming the Thanksgiving upturn into a full-fledged end-of-year rally. The conclusion of rate hikes and potential rate cuts have positive implications for the S&P 500.
Troy D. Hanson
November 24, 2023
The Thanksgiving holiday may have come and gone, but investors have something to be grateful for—a Santa Claus rally is on the horizon.
In the past week, stocks continued their upward trend with the Dow Jones Industrial Average rising by 1.3%, the S&P 500 gaining 1%, and the Nasdaq Composite seeing a 0.9% increase during the shortened trading period.
It appears that the stock market is truly gaining momentum, potentially transforming the Thanksgiving upturn into a full-fledged end-of-year rally. Seasonality certainly plays a role in this phenomenon, as historical data shows that since 1950, the S&P 500 has risen in price approximately 70% of the time from Thanksgiving through New Year’s Eve, resulting in an average gain of 1.7%.
The momentum becomes even more significant when the market experiences a robust run leading up to Thanksgiving. This year, the S&P 500 soared by an impressive 8.1% in the month before the holiday—the most substantial increase since 1999 when the index went on to achieve another 3.7% gain by year-end. These figures indicate further potential for a year-end rally.
However, there's more to this potential rally than just technical factors. Jessica Rabe, co-founder of DataTrek Research, suggests that the conclusion of the Federal Reserve's tightening cycle is also playing a significant role. The last interest rate hike occurred in July, and the market is gradually embracing the notion that it marked the end of this particular rate-hiking campaign.
The upcoming weeks hold promise for investors who are looking forward to enjoying the benefits of a Santa Claus rally.
The S&P 500 and the Potential Impact of Rate Hikes and Cuts
The S&P 500 has historically seen positive results following the end of rate hike cycles. According to Rabe, the index has averaged a 17% increase in the year after the last increase in cycles in 1995, 2000, 2006, and 2018. Given that the S&P 500 has remained relatively unchanged since the Fed's last interest-rate hike in July, it suggests that there is significant potential for growth.
However, it's not just the end of rate hikes that could benefit the market. There is also the possibility of rate cuts in the near future. The CME FedWatch Tool indicates a 25% chance of a rate cut by the March 2024 meeting, and greater than 50% odds of rates falling by May. This aligns with historical patterns, as the central bank has typically started lowering rates approximately nine months after its final hike, which in this case would be at the policy meeting ending on May 1.
Market trends suggest that fed-funds futures could begin indicating majority odds of a rate reduction around this time, as markets tend to take into account historical data. While a rate cut could be concerning if it was intended to prevent a recession, it appears that the U.S. economy is on solid ground. The November S&P Global Flash U.S. Composite PMI, which measures economic activity in manufacturing and services sectors, came in at 50.7. Any reading above 50 indicates an increase in economic activity, which suggests that economic growth is currently in a favorable position while inflation continues to decrease.
In conclusion, both the conclusion of rate hike cycles and the potential for rate cuts have positive implications for the S&P 500's performance. With the U.S. economy showing signs of strength, investors may have reason to be optimistic.