S&P 500 Closer to Record Highs

US stock markets rose on Tuesday, December 26, after retail sales data showed consumers continued their holiday spending. The S&P 500 (USA 500) gained 0.4%, coming only 0.5% shy of a record high. Nasdaq (US-TECH 100) and Dow Jones Industrial Average (USA 30) also rose, but the two major indices have already hit record highs, leaving the S&P 500 behind. 

The gains suggest a so-called "Santa Claus rally", where stocks typically rise in the last few trading days of the year and the first two days of the new year. However, the S&P 500 has already risen over 12% in November and December. Although some analysts believe investors sitting on cash may look to jump in due to FOMO (fear of missing out), others feel that those getting in late are buying the "euphoria".

What May Have Fuelled the Santa Rally?

Mastercard said US retail sales grew 3.1% between November 1 and December 24. While growth was lower than last year's 7.6% beat, many shoppers spent a good amount of cash during the holiday period. In addition, despite many waiting for Black Friday and Cyber Monday deals to finish shopping, the data revealed some optimism heading into 2024 without a recession.

Moreover, there has been continued buying of stocks on expectations that the Fed will cut interest rates as early as March next year. In fact, analysts believe any market pullbacks are likely to be short-lived given the strong momentum and improving investor sentiment. Last Friday, December 22, muted inflation data affirmed the Fed's policy shift, increasing speculation that the dollar could come under further pressure

Treasury bond sales drove some of Tuesday's optimism. They attracted strong demand from investors looking to lock in higher yields before the Fed starts cutting rates. Indirect bidders, including foreign central banks, bought a record 77.6% of 52-week Treasury bills and 71.6% of 6-month bills.

However, Rick Rieder, BlackRock (BLK)’s chief investment officer of global fixed income, said that expectations of 150 basis points rate cuts starting as soon as March are way too optimistic. He believes parts of the Treasury curve, like bonds with 5-7-year maturity, are set to benefit the most from the expected rate cuts, with 5-year yields possibly falling, but by around 50 basis points only. (Source: Reuters)

Can the S&P 500 Hit Record Highs?

According to a Bloomberg survey of experts, the S&P 500 index is forecasted to hit a record high in 2024, topping 4800. However, some analysts warn that a further drop in Treasury yields could indicate a slowing economy and drag stocks. 

On the optimistic realm, some analysts argue that the stock market has now adapted to the higher interest rate environment, with a reputable strategist going as far as calling a top at 5200. Others even believe the S&P 500 could still reach a record high by the end of this year despite recent volatility, while others go as far as suggesting the bull run can last well into 2025 and 2026, supported by the Fed's pivot and cooling inflation. However, previous rate cuts in 2000, 2007, and 2019 were all followed by recessions shortly after the pivot. Could this time be an outlier? (Source: Bloomberg)

As views diverge, traders may want to remember that the 2023 rally has been narrow, led chiefly by mega-cap tech stocks rather than broad participation. So, even if the S&P 500 hits a new record soon, the gap since the last record on January 3, 2022, would still be shorter than average compared to the previous bear market. It would count around 500 trading sessions compared with around the average of 3 years, with gains past new records pointing to limited upside.

Conclusion

Wall Street analysts are positive about the stock market's prospects, expecting the index will hit a record high in the next 12 months, but risks remain due to the shrinking money supply and inverted yield curve. If a recession does occur, history shows the S&P 500 could fall by around 22%, bottoming before the recession ends. If not, some analysts believe this could be just the beginning of a multiyear run. 

In any case,  trying to time the market is difficult, and using history as a guide may help investors navigate the complex macro environment and offer some good opportunities when stocks rebound.