After having spent the entire year 2022 ebbing and flowing through several economic blows and developments, the U.S. market is bracing itself for whatever predicament 2023 holds. Investors are still uncertain about where to bet and are reacting to any news that is coming, keeping the markets highly volatile. However, the typical year-end rally, also known as the Santa Claus rally, may not come to pull the market into the new year with fresh enthusiasm this time.
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The events of the past few months have established the fact that 2023 is going to be a year of economic contraction. Economists have been expecting a recession for months, and most are now seeing it coming inevitably next year. However, the good news is that 2023 is expected to be less volatile than the turbulent 2022. And this is exactly what is keeping investors from pushing the market to a year-end rally.
Since 1950, the stock market has consistently performed well every December. The Dow Jones market data shows that on average, the S&P 500 (SPX) has generated a 1.42% return during December. Out of these 72 years, the average has only declined 18 times. This year is expected to be among the slower ones.
Why is this a trend? Investor emotions. Spirits are high during the holiday season. A new year is knocking at the door. People are driven by focus, New Year’s resolutions, and an overall positive attitude toward what awaits them. More people enter the stock market, and existing investors up their games.
Yet, this time it is slightly different. The market is just ending a year of economic, geopolitical, and bio-economic disruption. Despite October and November’s progressive deflation, the macroeconomic environment has not changed much. Inflation is still much higher than the Federal Reserve’s target of 2% to 3%, and interest rates are still high but not restrictive enough to slow down the labor market. This has kept a door open for the central bank to appraise interest rates higher in order to kneecap the labor market and stunt wage growth, as this brings inflation down effectively.
Investors are aware of the situation, going into 2023, and are thus treading more cautiously than in other years. 2023 will bring a recession, but a planned and predictable one that the market has been primed to face. Stocks are firmly on track to end the year with losses, and even if any last-minute bout of optimism brings about a Santa Claus rally this week, it most likely won’t be strong enough to take the market to the next year in flying green colors.
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