On Monday, traders flocked to riskier corners of the market, sending the small-cap Russell 2000 Index soaring 1.5%, just shy of a three-year closing high. The performance sparked renewed optimism, with many seeing the potential for a strong end-of-year rally. Wall Street history supports this sentiment, as this week marks the start of a seasonally strong period for stocks. From the Tuesday before Thanksgiving through the second trading day of the New Year, the S&P 500 has posted gains 80% of the time, averaging a 2.6% increase since 1950, according to the Stock Trader’s Almanac. Small-cap stocks have performed even better, with the Russell 2000 showing an average gain of 3.3% since its inception in 1979.
“It’s hard to bet against the market right now, and you can’t fight the tape,” said Jeffrey Hirsch, editor of the Stock Trader’s Almanac. “Even with the S&P 500 up more than 20% this year, it doesn’t rule out the possibility of a year-end rally.”
Both the S&P 500 and Russell 2000 marked their sixth consecutive days of gains on Monday, their longest winning streaks since September. Over this period, the small-cap index has surged 6%, while the S&P 500 has risen 2%.
Investor sentiment has been buoyed by easing bond yields, with many shrugging off ongoing geopolitical tensions in the Middle East. There is also growing optimism that the Federal Reserve has reached the peak of its interest rate hikes, with expectations for lower borrowing costs ahead. Additionally, President-elect Donald Trump’s nomination of Scott Bessent as Treasury Secretary has been viewed as a moderating force, potentially easing some of the administration’s more challenging trade and economic policies.
However, not all market watchers are convinced that a rally is guaranteed. Critics point to persistent inflation, high interest rates, and geopolitical uncertainties as reasons to temper enthusiasm. Yet, Hirsch remains focused on the immediate outlook rather than longer-term risks.
Historically, the period from November to January has been the most favorable for stocks, driven by increased stock purchases from companies and pension plans, particularly after November 1. Ryan Detrick, chief market strategist at Carson Group, noted that the market typically experiences a lull leading into Thanksgiving before rallying.
Still, risks remain, particularly given the S&P 500’s current performance. The index is on track for two consecutive years of more than 20% gains, a rare feat not seen since the late 1990s. With valuations near historical highs, some traders are beginning to question whether it’s time to reduce exposure to equities after such a strong run.
Year-end rallies tend to be more subdued when the S&P 500 has already gained more than 20% in the year. Historical data shows that since the 1970s, the average return from now until December 31 in such years has been around 1%, according to Bloomberg.
Investors are taking notice of these concerns. A Deutsche Bank measure of equity exposure among discretionary and systematic investors showed a slight pullback last week, though it remains above average.
“There are a lot of skeptics out there,” Hirsch acknowledged, but he added, “It’s very hard to be bearish right now.”
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