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Stocks Finished November Strong. Is a ‘Santa Claus Rally’ Coming in December?


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U.S. stocks had a bumpy ride this week because of comments from Federal Reserve Chairman Jerome Powell on Wednesday and a better-than-expected jobs report on Friday. 

Investors are scrambling to determine how the Fed will handle future interest rate increases as the central bank tries to bring inflation down to its target of 2%. 

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” Powell said in a Wednesday speech. He indicated the pace of rate increases could start to slow at the Fed’s next meeting Dec. 14.

That sent stocks soaring with a positive close for all three major indexes on hopes for a 50 basis point increase at the Fed’s next meeting – smaller than recent 75-basis-point hikes. The S&P 500 was up 5.4% for November, the Nasdaq Composite gained 5.7%, and the Dow Jones Industrial Average advanced 4.4% for the month thanks in part to its best day in three weeks following Powell’s remarks.

December started with a strong jobs report that sent stocks sliding on Friday. The country added 263,000 jobs in November, according to the Bureau of Labor Statistics, much higher than expected. The unemployment rate held steady at 3.7%. That’s a case of good news being bad news for investors, as it could nudge the Fed toward more interest rate hikes.

One area of the economy already taking huge hits is housing. A report from the National Association of Realtors (NAR) shows existing home sales have been down for nine months in a row. With mortgage rates near decades-long highs, buyers and sellers are wary of more interest rate increases and the effect they could have on unemployment or a potential recession in 2023.

As for the price increases causing so much anxiety in the economy, it’s a mixed bag as the government’s October core personal consumption expenditures (PCE) report, the Fed’s preferred measure of inflation without food and energy, showed a low 0.2% increase from the previous month and a 5% increase year-over-year. That’s still higher than desired and the path forward nearly assures more volatility is around the corner.

That said, the overall market tends to rise around the holidays. Carson Group’s Ryan Detrick showed research that “no month is more likely to be higher for the S&P 500 than December, up 75% of the time since 1950.” History shows a so-called “Santa Claus rally” is possible this month, especially in a year when consumer spending has already hit record highs from nearly 200 million shoppers on Black Friday and Cyber Monday. 

But the year isn’t over yet and anything can happen in what’s shaping up to be a rollercoaster year for the stock market. Regardless of what the market does through the end of the year, experts recommend staying the course and dollar-cost averaging toward your long-term investment goals.

Why the Federal Reserve Is Raising Interest Rates Right Now

For the last several years, bountiful jobs, record-high wages, and low interest rates heated up the economy to a point where everyday expenses like food, utilities, and housing are now more expensive. 

Two of the Fed’s central mandates are to maintain low unemployment and keep inflation at a healthy level — around 2%. It does that through monetary policy, including adjusting the money supply in the country to make interest rates move toward the target rate they set.

The intention of the recent rate increases is to “reduce demand for consumer products, which is going to, in turn, slow down inflation,” explains Daly Andersson, co-owner and managing partner at Tenet Wealth Partners.

That’s because higher interest rates mean higher costs of borrowing for businesses and individuals, which should cool down demand and reduce long-term price growth. However, raising interest rates too fast or high could potentially lead to an economic recession in the short term, which the Fed wants to avoid – but it’s a delicate balance to get right.

There’s still one more Fed meeting later this month, which investors eagerly await. 

“There’s more expectation that the rate hike is going to be 50 basis points rather than 75,” Andersson says. “And maybe even expectations that if inflation continues to abate and we see some effects from their policy, that maybe they don’t have to be as stringent with rate hikes throughout 2023.” 

Pro Tip

Even – and especially – when there’s volatility in the stock market, the best course of action is to be aware, but stick to your investing plans. It’s impossible to time the market, and historically speaking, it’s always recovered. Stay the course through the dips and peaks, and remember why you’re investing.

Will the Stock Market Recover? 

As the Fed navigates inflation and uses interest rate hikes as the main tool to curb it, investors are weighing the possibility of whether we’ll have a recession or a so-called “soft landing.” 

Though it may seem counterintuitive, signs of a slowing economy are actually what investors are looking for. “Any numbers that are showing a more restrictive economy are going to be positive [for the stock market] in terms of showing that it’s going to lead to lower inflation numbers,” Andersson says. “Inflation is still going to be that lagging indicator. It’s going to take a while to see a difference in those figures.” 

Whatever happens, experts are expecting a volatile finish to 2022 – and where the market is headed is anyone’s guess. 

Keep in mind that investments easily outpace inflation over time – even with the normal ups and downs, which are a normal function of a healthy market. 

“Part of investing in the market is accepting that there can be volatility and risk,” Andersson says. “But over longer time horizons, overall the growth path is positive. That’s the reason we all invest.” 

How Investors Should Deal With Stock Market Volatility

For new investors, big swings in the market can be a lot to handle. There’s a lot of uncertainty right now because of interest rate hikes that raise the cost of borrowing, as well as everyday commodities getting more expensive due to inflation — and the market reflects that on a day-to-day basis. 

But if you have a buy-and-hold strategy, remember that slow and steady wins the race. The best-performing portfolios are the ones that have the most time in the market. 

“This is where things get challenging for all of us, because we’re human,” Andersson says. “We have emotions when it comes to our own money. But what we’ve seen historically is when we react to [market volatility], it’s often to our own detriment.” 

“Going against the grain and [doing] what feels counterintuitive is actually the right thing when it comes to investing,” says Ashley Sullivan, CFP, private wealth advisor at LVW Advisors.. There are opportunities now, she says, “for us to lock in higher yields on the highest quality asset in the world” – the stock market. 

Experts recommend diversifying your portfolio with low-cost, broad-market index funds, so your eggs aren’t all in one basket. Make sure your investments are appropriate for your goals, timeline, and risk tolerance.

Dollar-cost averaging spreads out your deposits over time, and has been demonstrated to perform better during a period of high market crashes, according to Rebecka Zavaleta, creator of the investing community First Milli

Whatever you do, invest early and often, especially if you have a long investment timeline. Dips and crashes will happen, and so will other scary-sounding things like economic bubbles, bear markets, corrections, and recessions. 

You can even take advantage of a dip to invest more, but not if it impacts your regular investing schedule. It’s hard to tell when there will be a dip or correction, and no one can time the market. As an investor, the best response is to stay the course and keep investing, regardless of what the market is doing.





Read More: Stocks Finished November Strong. Is a ‘Santa Claus Rally’ Coming in December?

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