The stock market’s record run is poised to gain steam in the weeks ahead – if history is any indication.
The start of the holiday season is typically a strong time of year on Wall Street, a pattern that analysts point to as a reason to remain optimistic that the stock market will remain at all-time highs following a turbulent September.
Historically, November has been the best month of the year for the stock market – both since 1950 and over the past decade, according to LPL Financial.
That’s not all. History shows the stock market’s strongest six-month period is November to April, according to the Stock Trader’s Almanac. November is also the first month of the market’s best three-month stretch, November to January.
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This seasonal strength is created by a combination of factors. For one thing, the final three months of the year are typically the best for stocks, with stocks rising 3.8% on average, according to LPL Financial.
Strong spending by shoppers during the holidays also tends to translate into strong quarters for consumer-focused businesses. Some analysts also attribute it to optimism during the holiday season, year-end portfolio adjustments and investors being on vacation.
“November is the best month of the year, but it doesn’t seem to get nearly as much love as you’d think,” Ryan Detrick, chief market strategist at LPL Financial, said in a note to clients. “We all assume December is the best month, but November is actually better and gets very little fanfare. Maybe it should be a month for the bulls, not for turkeys.”
While October is often considered a spooky month for investors, earning a bad reputation following the crashes of 1929, 1987 and during the global financial crisis in 2008, investors weren’t so fearful this year.
After the S&P 500 recorded its biggest monthly loss since the start of the coronavirus pandemic in September, the broad index rebounded nearly 7% last month to its best October in six years on further signs that corporate profits are growing again following last year’s recession.
“It looks as though the market has resisted ‘Octoberphobia’ and averted the feared crashes or massacres that have given the month its bad reputation,” Jeff Hirsch, editor of the Stock Trader’s Almanac, said in a note to clients.
To be sure, November has taken hits during bear markets, when major averages drop more than 20% from a recent peak.
For instance, November 2000 was the Nasdaq Composite’s second-worst month on record, with the technology-focused index plunging nearly 23%, according to the Stock Trader’s Almanac. Only October 1987 was worse, and that is when the “Black Monday” stock market crash occurred.
The U.S. economy slowed substantially from July through September following a series of obstacles, including a surge in COVID-19 cases, supply chain bottlenecks, rising consumer prices and the fading effects of federal stimulus measures.
But with COVID-19 cases now falling and vaccinations rising, most economists are branding the weak showing a soft patch in a still-robust recovery from the pandemic-induced recession, with a healthy rebound projected in the final months of the year.
Still, the final two months of the year, which are traditionally a strong period for stocks, could come with more risks than usual in 2021.
The Federal Reserve is widely expected to announce this week that it plans to unwind its $120 billion-per-month bond-buying program, which was part of its pandemic-era stimulus measures that helped stocks more than double from their March lows.
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The recent disappointing growth data could reignite a debate among investors about whether the economy is slowing as inflation continues to run higher than expected, according to Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, an investment adviser.
On Wednesday, investors will watch for possible signals from the Fed that the recent rise in inflation may force the central bank to lift interest rates sooner than expected.
“As long as the re-opening continues and people go back to their offices, resume business travel and consumers maintain their spending patterns, then the economy can continue to grow,” Zaccarelli said in a note to clients.
Zaccarelli said he remains optimistic about the stock market for the rest of 2021 and into 2022, but added that the second half of next year is “going to become more challenging” if economic growth slows, inflation remains high and the Fed begins raising interest rates within the next 12-15 months.
There are signs that there could be more gains to come on Wall Street in the final months of the year on strong seasonality trends, better-than-expected corporate earnings and falling COVID-19 cases. Market breadth has also improved, meaning that more stocks are participating in the rally, a sign of a healthy and strong market.
Jobless claims have also fallen steadily in recent weeks, with continuing claims sliding below 2.5 million recently for the first time since the coronavirus pandemic began.
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After suffering its first 5% pullback of 2021 in early October, the S&P 500 has come roaring back and closed at a record high on Oct. 21. The S&P 500 Index has gained more than 20% so far this year, making more than 50 record highs along the way.
That could be a positive sign for investors in the coming months. The past seven times the S&P 500 had risen 15% for the year heading into the fourth quarter, that final quarter ended up higher each time, rising 5.8%, data from LPL Financial showed.
“We firmly believe that new highs are something to be embraced, not feared, and history shows that new highs tend to come in bunches – something that has certainly been true so far this year,” according to Detrick.
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