S&P 500 Index: Should You Expect a Santa Claus Rally In 2023?

The S&P 500 saw an increase of about 1% last week, suggesting a period of bullish consolidation after the significant rally in November, where the index climbed 8.9%.

However, itU+02019s premature to draw firm conclusions. Notably, over the past couple of days, there has been a noticeable pattern: technology stocks are underperforming while small caps are excelling. 

For instance, on Friday, the Nasdaq Composite, which has been the top performer among major indexes year-to-date, recorded the smallest gain (+0.56%), while the Russell 2000, the lowest performer year-to-date, showed the highest increase (+2.44%). This shift might indicate a potential trend towards investing in small caps or value stocks, possibly due to a belief that thereU+02019s more potential for relative gains in these undervalued sectors. 

One hypothesis for this trend is that if interest rates decrease and the economy is on track for a gentle deceleration, the undervalued small caps might be set for a significant rebound.

However, an opposing view suggests small caps have been underperforming for valid reasons and may represent a risky investment. As it stands, itU+02019s a development worth watching, and time will ultimately reveal the outcome of these market dynamics.

 

Will this momentum continue for the S&P 500 index?

Stocks are reaching their daily highs, coinciding with a notable drop in 10-year yields to their lowest in two months, now at 4.22%. The decline in yields seems to be a reaction to comments made late last week by Federal Reserve Chair Jerome Powell.

Although Powell didnU+02019t offer any new insights, stating itU+02019s premature to say that policy settings are adequately aligned to meet their goals, investors seemed to latch onto his remark that monetary policy is firmly in restrictive territory.

Consequently, the SPX, DJI, and RUT are all poised to close at their highest levels in several months. The SPX is below the 4,600 resistance level, leaving market watchers curious if it will surpass the threshold this week.

Meanwhile, the DJI has already achieved a 52-week high, with additional gains on Friday, and the RUT is revitalizing to two-month highs, aligning with the decline in 10-year yields. 

Considering these factors and a generally bullish market trend typical of this season, the market may continue to trend upward next week.

However, a couple of uncertainties linger: 

Will the SPXU+02019s struggle to break past 4,600 dampen the upward momentum in the RUT/DJI? and

What impact will next FridayU+02019s Nonfarm Payrolls report have on this trend, particularly if it shows robust figures?

Remembering that stocks reacted favorably to last monthU+02019s weaker-than-expected nonfarm payrolls report (150K vs. the 160K estimate, with unemployment rising to 3.9%), investors might prefer figures that hint at a relaxing labor market.

 

Interest rate hikes on the cards?

BloombergU+02019s data indicates that the likelihood of the Federal Reserve lowering interest rates in either their December or January FOMC meeting is currently at 9.2%. This contrasts with a higher 12.8% chance of increased rates, as noted last Friday. 

Observing these week-over-week probability shifts offers insight into market reactions to recent economic data and comments from the Fed. According to BloombergU+02019s forecasts, thereU+02019s a significant chance (over 65% probability) of a rate cut at the May 2024 FOMC meeting.