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Stocks Waver to Begin December: Here's What to Expect

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The market rally that nearly everyone said was limited to the Magnificent 7 has begun to broaden out, as the Dow hit a 52-week high last week thanks to strength in industrials and financials. The major industrial average appears to have begun a new leg higher and is now less than 2% away from an all-time high! The S&P 500 also notched a new closing high for the year on Friday.

While we fully expect the Dow to ultimately surpass that level as other industries play catch-up to tech, we need to be realistic about future returns in the short-term. There’s a very small chance that December will pan out like November did. Simply put, markets rallied strongly off of oversold levels after entering a correction in October.

The widely-followed volatility (VIX) index also hit a low for the year last week, but is surging this morning in conjunction with a slight selloff in stocks. Low-volatility periods are a hallmark of bull markets; still, periods of low volatility are inevitably followed by periods of high volatility. Insurance in the form of put options is cheap here, and we wouldn’t be surprised to see some near-term weakness which would likely coincide with a temporary rise in the VIX.

What to Expect in December

Let’s remember, however, that the month of December tends to be bullish; in pre-election years, the S&P 500 has been positive more than 72% of the time since 1950 with an average return of 2.9%. The historical stats point to a high probability, but let’s keep in mind that the latter half of December tends to bring the majority of those gains.

From a longer-term perspective, the outsized monthly returns from November bode well for a continuation of this new bull market. In previous instances where the S&P 500 achieved a greater than 8% return in a single month (30 times dating back to 1950), a year later the index was higher 27/30 times with an average return of 15.8%. Those are compelling odds to say the least.

The market’s breadth expansion is bullish and points to a higher probability that we will ultimately eclipse the all-time highs for the major indexes. As long as inflation continues to decelerate, new highs appear likely early next year. The S&P 500 is only about 5% away from that mark; the previous 14 times the index went at least a full year without a new high and then finally made one, a year later it was higher 13/14 times and up nearly 15% on average.

Fed to Hold Steady Next Week

Officials are beginning to come around to the idea that we are at the end of this hiking cycle. Fed Governor Christopher Waller signaled he has become more confident that rates are at the right levels, reinforcing the notion that the Fed is finished with its interest rate hikes.  

The best monthly performance in November for stocks since 2022 arrived in conjunction with a 2-year low in the Fed’s preferred inflation gauge, prompting calls for interest rate cuts. October’s core personal consumption expenditures (PCE) index, which excludes food and energy components, met estimates last week with a 0.2% monthly rise and a 3.5% year-over-year increase. The outcome cements expectations that we are at an inflection point in terms of monetary policy; markets are currently pricing in 2 cuts in the first half of next year and 2 more in the second half.

Next week brings the final FOMC meeting of the year, with another rate pause all but assured. Fed Chief Jerome Powell stated that it’s “premature” to discuss rate cuts. The fact is that the economy has shown it can weather a higher interest rate environment. What the Fed wants to avoid is an inflation resurgence, similar to what happened in the ‘70s.

Stocks to Watch

While most individual stocks were trading lower Monday morning along with the general market, a select few were bucking the trend. Cruise company Royal Caribbean Cruises (RCL - Free Report) spiked 3% to a 52-week high on an acceleration in booking volumes. Royal Caribbean intends to focus on new innovative ships and onboard experiences to boost its offerings. RCL stock has risen more than 130% this year and is a Zacks Rank #1 (Strong Buy).

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Audio and podcast streaming giant Spotify (SPOT - Free Report) gapped up nearly 9% after announcing layoffs of another 17% of its workforce, or about 1,500 employees. The workforce reduction was the third of the year. Spotify turned a surprise profit during the third quarter amid strong subscriber growth. A Zacks Rank #2 (Buy) stock, SPOT has surged nearly 150% this year.

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Crypto stocks are benefitting from a Bitcoin resurgence. The price of Bitcoin eclipsed $40,000 this morning, sending related stocks higher. Shares of Coinbase (COIN - Free Report) , the largest U.S. cryptocurrency exchange, rose nearly 7% in the early going. Coinbase has been witnessing positive earnings estimate revisions lately, garnering a Zacks Rank #2 (Buy). COIN stock has soared more than 300% in 2023.

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Final Thoughts

The first half of December tends to be mediocre, with most of the Christmas-themed gains coming in the latter half of the month. From a longer-term and historical perspective, forward returns are enticing following stronger months like we saw in November.

Recent strength in sectors like financials, industrials, and health care bodes well for a continuation of this new bull market. With the Q3 earnings season all but wrapped up, investors will be turning their focus to the historically bullish month of December along with positioning for the 2024 election year.

Disclosure: SPOT is a current holding in the Zacks Headline Trader portfolio.

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