Unpopular opinion. After inflation, stocks are nowhere near all-time highs. As a matter of fact, if we take the Nasdaq 100 which has been the clear darling this year and compare it to two years ago, after inflation, it’s still in a 12% drawdown.
It’s all good though. Stocks are “guaranteed” to push higher into year-end according to basement traders with squiggly lines on a chart. After all, Santa Claus is slimmer because of Ozempic and he’s more energized than ever. Interest rate cuts are supposedly coming next, and stocks will cheer the Federal Reserve reversing course.
What blows me away is that investors appear to be glossing over the conditions that would necessitate these rate cuts in the first place. And while unnaturally low volatility could indeed drive risk assets higher in the short term, I don’t think a Santa Class rally is guaranteed by any means into year-end. If anything, this December could play out like last year, which was the fifth worst in history, or 2018.
Why am I saying that? Because my risk-on, risk-off indicators look like they may flip to defense mode by the end of the week. Treasurys, which have been steadily moving higher in sync with Fed rate expectations, have not seen a robust “flight to safety” reaction yet, but certainly could if December surprises us. Traders are not fully hedging their bets against market turbulence.
Gold continues to hold, utility stocks may have started another short-term period of outperformance, and small-cap stocks can’t seem to quite get the short-term, persistent momentum they should in the event a seasonal rally plays out.
Given these mixed signals, current market conditions appear more neutral than bullish. This sets the stage for a December where risk asset prices could swing in either direction. The reliance on seasonal trends as a surefire investment strategy may not hold water.
The Bottom Line
Contrary to popular belief, seasonal trends are not the reliable factors many investors consider them to be. While they might provide insight into potential market movements, relying on them could lead to misguided investment decisions.
I remain cautious here in my thinking while continuously arguing we have been in a short-term risk-on sequence that won’t last. I still believe we are in a bear market, and that there is far more weakness beneath the surface than most realize. The year is not over, and big moves can still happen that surprise bulls and bears alike.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
