Stocks Are Positioned for a Year-End Rally

Photo Credit: Libby Penner, Unsplash

Weekly Market Recap for November 22nd

This week, the US stock market experienced a positive week, with the S&P 500 rising 1.8%, recovering from last week’s decline. Economic data releases included the S&P Global US Composite PMI, indicating that business activity expanded in November and existing home sales rebounded, showing a monthly increase of 3.5% The market remained cautious about geopolitical tensions, but strong earnings and expectations of a stable economic outlook supported the overall sentiment. Looking ahead, key economic indicators, including GDP data and consumer confidence reports, could influence market movements next week.

S&P 500 Index (Last 12 Months)

S&P 500 Technical Composite (Last 24 Months)

Taking Stock After the Election

The S&P 500 rose over +5% the week after the election as event volatility faded, while the Russell 2000 surged +10%. The broad equity market rally occurred as the VIX dropped from 20 to 14. The initial move higher after the election was likely that rally, with the S&P 500 surpassing 6,000 as investors closed out hedges. In addition, the decline in the VIX gave investors running targeted volatility strategies the "permission" to buy stocks, mechanically pulling them off the sideline as expected volatility decreased. Since then, the S&P 500 and the Russell 2000 have both given back a portion of their gains, and the VIX has risen above 16. The recent pullback likely reflects the market digesting those post-election gains. The near-term catalyst created by decreased post-election uncertainty and a falling VIX has now passed.

VIX Falls to 4-Month Low as Election Uncertainty Fades

Early 2025 Market Outlook

History suggests this year’s market strength can continue into January and February. Typically, the S&P 500 averages a +2% return in the first eight weeks after years with strong 1H returns. Layering this onto the anticipated year-end rally, the S&P 500 could surpass 6,100 and approach 6,200 in early 2025. What causes this year-end phenomenon? It’s difficult to pinpoint an exact cause, but one explanation is the process of institutional investors’ re-leveraging and collateral reinvestment. When the market rises, it creates additional portfolio gains. Investors aiming to maintain a certain portfolio leverage profile must increase their leverage to keep their exposure at the desired level. These flows often occur later in the year or in January of the following year, and other investors start to front-run the flows in December. Another factor could be the momentum effect, where investors continue to push the market higher to meet certain performance goals and earn bonuses. The US Risk Demand Indicator shows a strong positive reading; we do not see a reason to battle the market or sit on the sidelines in the near future.

Note: We want to emphasize that this exercise is more art than science and relies on average historical trends. Our intent is to demonstrate the potential for a continued rise into early 2025, and the analysis should not be interpreted as price targets.

First Half Strength Historically Continues into Second Half

Potential for Gains Early in the Next Year

Preparing for Year-End

What’s next? It is important to distinguish between the near-term and long-term outlooks. A solid first-half return historically leads to continued gains in the second half. The chart above shows that after a +10% or more gain in 1H, the S&P 500’s median 2H return is +10%. Since the start of July, the S&P 500 has gained over +7%. How could the S&P 500 end the year? History provides insight into the index’s potential path. We are currently in week 21 of the second half of the year, with 6 weeks until year-end. If we focus on the last six weeks of years, like 2024, when there was a greater than +10% 1H return, the average return is +2.7% through year-end. With the S&P 500 currently trading near 5,900, this suggests the index could reclaim the 6,000 level by 12/31.

Update on Bank Lending Standards

The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) revealed a mixed lending environment in Q3. Most banks reported unchanged to tighter lending standards and weaker demand across various loan types, including C&I, residential, CRE, and auto and consumer loans. However, banks reported that credit card demand in Q3 was stronger than pre-pandemic levels across most credit score categories, with increased demand for new cards, higher credit limits, and greater use of existing credit. Overall, the survey highlights a trend of unchanged to tighter lending standards across most loan categories, with weakening demand for many types of loans. This suggests that banks are being cautious in their lending practices while at the same time facing reduced borrowing appetite from consumers and businesses. Our take: Loan growth has been relatively weak since the Fed started tightening. Weak loan growth hasn’t been a significant headwind yet, with wage growth and a rising stock market helping to drive economic growth. However, if loan growth remains sluggish, it could pose a headwind to economic growth.

Look Ahead

The calendar is light next week due to the Thanksgiving-shortened trading week. This week's data releases included:

Retail Sales
Actual: +0.4%
Consensus: +0.3%
Prior: +0.8%
Commentary: Consumer spending is driving GDP growth this year and the strength is carrying over into Q4

Industrial Production
Actual: -0.3%
Consensus: -0.3%
Prior: -0.5%
Commentary: Mfg remains sluggish but distorted by Boeing strike (-0.3% headwind) & hurricanes (-0.1% headwind)

Housing Data
Commentary: Starts impacted by hurricanes in South; housing subtracted from GDP in Q2 + Q3 & likely to remain headwind due to recent rise in mortgage rates.

Starts
Actual: 1,311k
Consensus: 1,340k
Prior: 1,353k

Building Permits
Actual: 1,416k
Consensus: 1,435k
Prior: 1,425k

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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