The end of the year often brings a boost to the stock market, especially during election years and following strong annual performance. Let’s explore the key factors contributing to this bullish trend.
Seasonal patterns and election-year optimism
- Historic returns: November and December have historically seen above-average stock market returns.
- Election year bump: This trend is amplified during election years as political uncertainty recedes and investors anticipate favorable economic policies from the incoming administration.
- Momentum effect: A strong market performance earlier in the year can fuel investor confidence, leading to a self-reinforcing buying cycle.
The data below from Goldman Sachs shows that we are nearing a period that has historically been strong for the S&P 500 index.
- November and December: Since 1900, the median S&P 500 return for November and December is 2.9%.
- Election years: During election years, the median S&P 500 return for November and December increases to 3.4%.
Know the data’s limits
Past performance does not guarantee future results, and it’s essential to base investment decisions on fundamentals rather than short-term political events. Trying to time the market based on short-term dynamics, political or otherwise, is extraordinarily difficult.
Economic factors and investor sentiment
Several factors contribute to a positive outlook for stocks into year-end.
- Lower interest rates: Decreasing interest rates can make stocks more attractive investments compared to bonds.
- Strong corporate earnings: Positive corporate earnings can boost investor sentiment and drive up stock prices.
- Holiday spending: Increased consumer spending during the holiday season can stimulate economic growth and benefit the stock market.
- Portfolio rebalancing: Institutional investors often rebalance their portfolios at the end of the year, which can contribute to upward market momentum.
Conclusion
The combination of seasonal patterns, post-election optimism, economic factors, and investor sentiment suggests more upside for investors in late 2024. However, the ride could be bumpy, so investors should prepare for additional volatility.
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