Strong November Market Run Signals Bullish December: Ned Davis Research
A robust market performance through November often foreshadows a positive December, according to a recent analysis by Ned Davis Research (NDR). Their research suggests that the market’s momentum in November significantly influences its behavior in December. This finding, bolstered by historical data, paints a bullish outlook for the remainder of 2024, prompting investors to consider the implications for their portfolios. The analysis, however, also highlights nuances within this positive trend, providing context for a more informed investment strategy.
Key Takeaways: A Bullish December on the Horizon
- November’s Momentum is Key: Strong market gains in November historically predict further gains in December. This momentum effect is a significant factor to consider.
- Historically Strong December: December is typically the strongest month of the year for the market, adding to the positive outlook.
- NDR’s Bullish Stance: Ned Davis Research maintains an overweight recommendation for U.S. stocks despite the S&P 500 already exceeding their year-end target.
- Exceptional Performance in Strong November Years: When the S&P 500 gains over 20% through November, it rises in December 76% of the time, with a median gain of 2.1%.
- Limited Impact of Tax-Loss Harvesting: The positive December returns following strong November gains are not significantly inflated, partly due to the reduction of tax-loss harvesting opportunities.
Analyzing the Momentum Effect
Ned Davis Research’s analysis hinges on the principle of momentum investing. Chief U.S. strategist Ed Clissold emphasizes the adage, “One adage that has consistently tested well is, momentum leads price.” This suggests that significant gains tend to be followed by additional gains, creating a positive feedback loop in the market. This momentum effect, supported by extensive historical data, is a core component of their bullish December forecast.
The Significance of November’s Gains
The research highlights the significance of the S&P 500’s performance through November. In years where the index has risen by more than 20% by the end of November, December’s performance shows a striking pattern. Clissold notes that in these years, the S&P 500 has climbed in December 76% of the time, achieving a median gain of **2.1%**. While December is typically a strong month, this data suggests a further amplification of these gains in years following a particularly strong November.
Nuances and Context: Understanding the Complete Picture
While the overall outlook is bullish, it’s crucial to understand the nuances of NDR’s analysis. It’s important to acknowledge that the positive December returns following robust November gains are not unusually high compared to typical December performance. This is partly attributed to a phenomenon known as tax-loss harvesting.
Tax-Loss Harvesting and Its Impact
Tax-loss harvesting involves selling losing investments to offset capital gains, reducing tax liabilities. In years marked by substantial gains leading up to December, the opportunity for tax-loss harvesting is significantly diminished. This limits the potential for unusually large December returns, as the incentive for selling underperforming assets to offset gains earlier in the year is reduced. As Clissold explains, “The key takeaway is that positive returns have not pulled forward gains.“
Exception to the Rule: 1996
The analysis emphasizes the consistency of the observed pattern, pointing out that **1996 was the last year the S&P 500 declined in December following a 20% gain through November**. This highlights the rarity of a negative December in such scenarios, further strengthening the bullish outlook.
NDR’s Investment Recommendation and Market Outlook
Despite the S&P 500 already surpassing Ned Davis Research’s year-end target of 5,950, reaching an all-time high of 6,043.18 by Friday, the firm maintains a bullish stance. The index’s impressive rally of 26.7% this year, coupled with the firm’s analysis of historical market data, reinforces their recommendation to overweight U.S. stocks.
The Significance of the Year-End Target
The fact that the S&P 500 has exceeded NDR’s year-end target doesn’t diminish the positive message the firm conveys. The target is a benchmark, and exceeding it doesn’t negate the underlying momentum and historical trends that support their bullish outlook.
Strategies for Investors
Investors should consider this information within the context of their broader investment strategies. While the analysis suggests a positive outlook, external factors and individual risk tolerance should always be considered. Diversification and risk management remain crucial components of a sound investment approach.
Conclusion: A Cautiously Optimistic Outlook
Ned Davis Research’s analysis provides a compelling case for a bullish December, supported by historical data and a strong understanding of prevailing market dynamics. The momentum observed through November, coupled with the historical strength of December, paints a largely positive picture. However, investors are encouraged to maintain a balanced perspective, acknowledging the nuances highlighted by NDR and considering the implications within the context of their individual investment portfolios and risk tolerance.
The research underscores the importance of understanding market momentum and historical trends, particularly when forming investment strategies. While the outlook is favorable, a diversified and cautiously optimistic approach remains the key to navigating the complexities of the market.
