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Amid the thrilling surge in the stock market during November, the S&P 500 Index is signaling resilience with a remarkable tranquility, suggesting potential continued gains for equity investors until the year-end. The recent week saw the S&P 500’s daily moves averaging just 0.3% in either direction, the calmest in six months. Even as the market slowed down after an impressive first half of November, experts view this as a constructive digestion of the earlier robust advance.
Frank Cappelleri, founder of CappThesis LLC, notes, “The slowdown after such a strong first half of November should be considered constructive.” This calmness, characterized by a lack of euphoria, indicates a measured risk-on sentiment among investors and a reluctance to exit the market with the S&P 500 approximately 4% away from its record high.
While the S&P 500 Index recorded a modest 0.8% gain last week, ending its five-week winning streak, historical data suggests December is traditionally a strong month for the index, ranking as the third-best month since 1950 with an average gain of 1.4%. Portfolio managers often drive seasonal strength by boosting funds’ performance through strategic stock purchases toward year-end.
Despite the optimism, concerns linger on the economic front. Markets anticipate a soft landing, but uncertainties surround the economy’s resilience post the full impact of the Federal Reserve’s tightening measures. Lingering signs of contraction, such as a 13-month consecutive decline in US factory activity, add to the cautious backdrop.
Furthermore, the rally in 2023 has been notably narrow, with a limited subset of the market driving gains, posing potential risks. Societe Generale data indicates the narrowest group of drivers for a rally exceeding 15%. Additionally, momentum indicators, such as the benchmark’s 14-day relative strength index, suggest overbought conditions.
Brian Frank, portfolio manager of the Frank Value Fund, voices caution: “November’s strong run could end up stealing some of December’s historic strength.” He is strategically investing in small- and mid-cap staples companies known for dividends.
On the flip side, reassuring signals come from corporate executives increasing their firms’ shares in November, reaching the highest buyer-to-seller ratio in six months. The options market, too, reflects confidence, with the VIX futures curve indicating a lack of crash-protection demand.
As the market awaits the Federal Reserve’s December 13 policy decision, potential turbulence may arise from economic projections and Jerome Powell’s press conference. While Powell dismisses rate cut bets, bond traders are doubling down on expectations of Fed easing in the coming year, impacting various segments of the market positively.
The S&P 500’s eerie calm suggests a calculated and steady ascent, but challenges and uncertainties persist, making the upcoming weeks a crucial period for equity investors.
