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Investing.com -- U.S. equities are entering a historically strong period, and the Stock Trader’s Almanac says seasonal tailwinds could help markets stabilise after a sharp November retreat.
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The firm notes that December is “the third best DJIA, S&P 500, and NASDAQ month of the year” and the Russell 2000’s second best, with average gains ranging from 1.4% for the S&P 500 to 2.1% for small caps.
Even in post-election years, performance “remains respectable” between 0.8% and 2.2%, according to the firm.
But the backdrop is complicated by a market pullback driven largely by Fed uncertainty.
According to the Stock Trader’s Almanac, the downturn aligns closely with the Fed’s October 29 meeting, where Chair Jerome Powell “flip-flopped from being dovish” and signalled no immediate rate cuts.
While many explanations have circulated, the firm argues “it’s all about the Fed.”
Major indexes have fallen from recent highs, with the S&P 500 down 5.1% since its Oct. 28 peak.
Still, the Stock Trader’s Almanac characterises the drop as “a healthy pause after a long upside run,” adding that “November dips often precede year-end seasonal strength.”
Seasonal signals will strengthen into late December. The firm explains that the Santa Claus Rally, defined as the last five trading days of the year and the first two of the next, begins on Dec. 24.
Meanwhile, small-cap seasonality is also said to be “stirring,” with typical tax-loss selling creating room for a year-end bounce. However, the Stock Trader’s Almanac cautions that support levels are “crucial” and that failure to hold could see markets “fall further into a 10% correction.”
If the Fed softens its stance, the Stock Trader’s Almanac says stocks “can resume their rally to year-end and bring the Santa Claus Rally to Wall Street.”