Did the Christmas rally come too early to the stock markets? Here are the risks!

Wall Street indices entered the rally mood again in the fourth quarter. Artificial intelligence technologies becoming the focal point again, the deceleration of inflation in the US and the growth of the economy were the most important reasons for the rise in stocks.

The S&P 500 Index, which is seen as the benchmark index of the US stock markets, has risen more than 10% since 27 October and erased all of its losses in the previous month. The technology-heavy Nasdaq Composite Index rose 13% in the same period. The rise in indices was like an early Christmas gift for Wall Street investors. However, according to Insider, this rally may also prepare the ground for a boring year-end in stock markets for investors who are worn out after a difficult year.

Christmas rally in November Santa Claus costumes or other year-end traditions do not mean much for the stock markets. What is important for investors is that stock markets are at their historically strongest position in December. According to Stock Traders' Almanac data, between 1950 and 2022, the S&P 500 Index returned an average of 1.4% in December. There are many explanations for this high return. Some say that investors have become more seasonally optimistic, while others say this strong return is just a statistical anomaly. Whatever the reason, the Christmas rally seems to have come early this year. Investors have been bombarded with positive economic data over the past four weeks. US gross domestic product rose 4.9% in the third quarter, US inflation is slowing faster than expected and the labour market remains stable despite aggressive interest rate hikes by the Federal Reserve. "The Santa Claus rally came early this year for three reasons," Nuveen Chief Investment Officer Saira Malik said in a statement on Bloomberg. One of them is that inflation is below expectations. It also signals that the FED has ended the interest rate hike cycle, and finally, the economy is slowing down enough to put us into recession."

Has the fuel of the rally run out? The early Christmas rally boosted investors' morale this month. However, as a result of this rally, December may be a little calmer for global stock markets. The S&P 500 Index stalled last week, rising only 1% since 14 November. The benchmark index's current level of just over 4,500 points reflects the year-end targets of Wall Street banks, including Morgan Stanley and Goldman Sachs. According to Morningstar Strategist Michael Field, who believes that there is not much economic data on the horizon that could encourage US stocks to rise further, the recent slowdown in the stock market rally is also a sign that there may not be much room for upside.

Field said in his statement in Insider that the early Christmas rally is the closest scenario for the markets. The strategist said, "Most of the balance sheet season is over. We got the headline macro data, so there is no real upside catalyst. But on the other hand, it is unlikely to be a collapse for the market. Investors should know exactly why they are in the market." Nuveen's Malik expressed a similar view, pointing out that the recent rally does not offer many clues about how stocks will follow in 2024. Some Wall Street investors are still worried that the US economy may enter recession. Investors can't decide whether the Fed will keep interest rates high to beat inflation or aggressively cut interest rates to prevent economic collapse.

Malik said, "2024 looks a little more complicated. Inflation is still above target and we are not in a recession. So I don't understand why the FED will cut interest rates so aggressively."

In short, a quiet Christmas period may be waiting for the US stock markets this year. According to experts, Wall Street bulls seem to have consumed all the fuel stored for the year-end rally during November.

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