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US stocks to be strong in December

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The stock market traditionally shows strong growth in December. Clearly, due to the spread of Omicron, the new coronavirus variant, and a more hawkish Federal Reserve, this could not be the case this time. Let us look at the facts: the S&P 500 showed the best performance in November-December. The stock market has not radiated such optimism since 1950.

According to Stock Trader's Almanac, the stock index rose an average of 1.7% in November and 1.5% in December. However, reports about the spread of a new COVID-19 strain in the very last days of November spoiled the overall picture and dampened optimism. Investors grew more cautious, and the S&P 500 showed a monthly decrease of 0.8% as a result. At the same time, the Omicron variant is not the only reason behind the decline. A more hawkish Fed also contributed to the fall in the stock index.

After the release of strong data on the US jobs market, the US stock indices went up again. At the moment of writing, the Dow Jones rose by 0.64%, the NASDAQ dropped by 0.07% and the S&P 500 added 0.34%.

While risks of a slowdown in the global economic recovery are unlikely to fade away anytime soon, the stock market may still finish the year on a strong note. So, they are unlikely to significantly affect stocks.

According to Bespoke Investment Group, the S&P 500 produced the best returns in December 74% of the time since 1928. The month of December brings stocks with the highest market capitalization the biggest returns, no other month can boast such high performance.

Bespoke's Macro Strategist George Pearkes said that the main secret about the success of the stock market in December lies in the fact that people tend to increase their positions by the end of the year. Indeed, stock prices are mainly on the rise throughout the year. Ryan Detrick, chief market strategist at LPL Financial, notes that investor interest in buying stocks is always high at the end of the year. But for that, it is necessary that the S&P 500 stock index shows growth within the previous 11 months.

The Cboe Volatility Index, a popular measure of the stock market's expectation of volatility on Wall Street rose on Tuesday to levels seen in the market during the last week's mass sell-off fueled by the Omicron variant and statements of Fed Chairman Jerome Powell.

As a reminder, expectations of a more hawkish Fed may trigger additional volatility in the stock market in December. First of all, this would affect tech stocks. Indeed, technological companies hope that the Fed's hawkish rhetoric will not affect them. By the way, the tech sector has a dramatic influence on the S&P 500. Notably, tech stocks helped send the index to record highs this year.

The S&P 500 information technology sector is trading at 27.5 times forward 12-month earnings estimates compared with its historic average of 20.8 times, according to Refinitiv Datastream.

Investors are also attempting to project the potential impact of the Omicron variant. Goldman Sachs has mapped out four scenarios of how the strain may spread and its potential impact on global growth. A "downside" scenario, in which a large wave of infections leads to lockdowns and global economic stagnation, could slow global growth to 2% in the first quarter of 2022, or 2.5 percentage points below its current forecast.

Many investors, however, believe stocks will remain buoyant. Experts suggest that stocks will unlikely drop sharply. It is corporate earnings and the likelihood of an expanding economy that should keep the stock market from collapsing.

The material has been provided by InstaForex Company - www.instaforex.com

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