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End of the year rally? A bullish stock market pattern is set to collide with stagflation fears

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The period between now and the end of the year marks a historic bullish final stretch of the year for US stocks, especially just before and after Christmas. The question for investors is whether the favorable seasonal factors will be outweighed by economic fundamentals.

Momentum for a year-end rally in stocks seems to be picking up steam now after the S&P 500
SPX,
-0.03%

It rose 12.6% from its October low – buoyed by better-than-expected inflation reports for the past month and business-friendly Republican reports. Narrow win from home.

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Dow Industries
DJIA,
+0.45%

It has jumped nearly 20% since its lowest level in late September, on the cusp of a threshold that would be Exiting a bear marketwhile the Nasdaq Composite put in a mediocre performance as investors remain in a wait-and-see mode over the Federal Reserve’s December interest rate decision, more inflation data, and geopolitical risks abroad.

Major indices posted gains in a shortened Thanksgiving week, with the Dow Jones up 1.8%, the S&P 500 up 1.5% and the Nasdaq Composite advancing 0.7%.

Then there are seasonal tailwinds towards the end of the year. According to market data from Dow Jones, the S&P 500 rose 71% in the period from Thanksgiving to the end of the year, based on numbers going back to 1950. On average, the large-cap index rose 1.8% in that period. This data can be a rough guide for investors, but it does not guarantee performance in a given year, as the red lines in the chart below show.

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Dow Jones market data

This favorable seasonal pattern could clash with fears that 2023 could bring stagflation: the worst possible economic outcome for which investors will be hard-pressed to prepare. Stagflation is defined as a period of slow economic growth plus persistently high inflation, a dynamic that may already be underway in the United States

Warnings of a possible deep recession in the US flash regularly in the bond market, with the spread wide between 2 –
TMUBMUSD02Y,
4.508%

and 10-year Treasury yields
TMUBMUSD10Y,
3.700%

It’s still near -80 basis points — which means the 10-year rate stands roughly 0.8 percentage point below the two-year yield. The curve last week reached a level Most reflective since 1981. Such reversals are seen as a reliable indicator of recession.

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US growth It turned positive in the third quarter and inflation appears to be declining, based on Consumer price index for October The annual headline rate fell to 7.7% from 8.2% previously. However, price gains are not coming fast enough for the Federal Reserve to completely abandon sharp interest rate increases, which could send the world’s largest economy into contraction.

said Mark Newman, founder of the Atlanta-based company restricted capital And creator ESG index for orphans Which tracks stocks with a combined market capitalization of $3 trillion.

This is a reversal of the market trends that have prevailed for most of this year and is “due in part to investors being extreme in these trades being tipped by a fear of missing out.” [on] “Year-end rebound,” said Jason Drahue, head of asset allocation for the Americas at UBS Global Wealth Management.

Adding to last month’s bullish tone in stocks was a stronger-than-expected October retail In addition to weaker than expected Product price reportBoth show that “the economy is holding up well, despite the continuing rise in short-term interest rates,” said Sam Stovall, senior investment analyst at CFRA Research in New York.

“Seasonality will provide a little bit of a support for equities at the end of the year, and I think investors are expecting the Fed to rise 50 basis points in December and maybe not be all that hawkish in their statement,” Stovall said via Cross. phone. “Right now, the stock market is assuming we don’t fall into a recession or, if we do, it will moderate and the Fed will likely cut rates in the latter part of 2023.”

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He said the CFRA’s economic outlook calls for the US economy to narrowly ride out recession, yet still fall into stagflation, followed by a U-shaped recovery, rather than a V-shaped recovery.

“If the inflation trend continues to go downward — that is, inflation drops gradually but consistently — that would be enough to make investors complacent, in my view,” Stovall told MarketWatch. “Additionally, we expect to see improved corporate earnings growth as we move into 2023.”

According to Stephen Suttemeyer, chief technical equities strategist at BofA Securities, the last 10 trading sessions of December through the first 10 of January have proven to be a bullish period for the S&P 500, time and time again: the index is up 72% in that time with an average return of 1.19% during the last 10 trading sessions in December, he said. That strength tends to carry over into the new year, as the S&P 500 is up 64% of the time with an average return of 0.72% through the first 10 days of January.

Mark Hulbert: It’s probably going to be “Santa Claus going up” for stocks this year — but you won’t be opening presents until after Christmas

These year-end seasonal factors work in conjunction with a well-known pattern that has seen stocks perform at their best over a period of six months Starting in November.

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The six-month period from November to April tends to particularly favor stocks across the range of cyclical stocks, according to strategist Rob Anderson and analyst Thanh Nguyen at Ned Davis Research. The NDR’s Broad Cyclical Index, which includes the industrial, consumer appreciation and materials sectors, has outperformed a defensive basket made up of commodities, health care, utilities and telecoms, on average, among those six months since 1972.

They also said that technical reasons support the case for a year-end rally in US stocks, while noting that “external forces can overwhelm seasonal trends.”

Source: Ned Davis Research

Highlights for the week ahead include Thursday’s release of the Fed’s preferred inflation measure for October and Friday’s November non-farm payrolls report.

On Monday, MarketWatch interviewed St. Louis Federal Reserve Bank President James Bullard. Tuesday comes the S&P Case-Shiller US Home Price Index, FHFA US Home Price Index, and November Consumer Confidence.

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do not miss: Fed’s Bullard is scheduled to speak on inflation and interest rates at a MarketWatch Q&A on Monday

Key data releases on Wednesday include the ADP employment report, a revision of Q3 GDP, the Chicago PMI, October job openings and layoffs updates, and the Fed’s Beige Book report. Federal Reserve Chairman Jerome Powell is scheduled to speak at the Brookings Institution.

The batch of data released on Thursday includes the Weekly Unemployment Claims, the October Personal Consumption Expenditure Price Index, the S&P US Manufacturing PMI, and the ISM Manufacturing Index. On Friday, November’s non-farm payrolls and unemployment rate will be released.

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MicroStrategy is at its lowest level since 2020 after the sales were revealed

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(Bloomberg) — Shares of MicroStrategy touched their lowest level since August 2020 after the enterprise software company, which in recent years has been known as the largest buyer of bitcoin, revealed its first sale of the token.

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The stock fell 1.1 percent to $136.63 on Thursday, down 75 percent this year. Bitcoin rose less than 1% to around $16,590 and is believed to have fallen 64% since the start of the year.

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In a filing on Wednesday, MicroStrategy said it acquired approximately 2,395 Bitcoin between the beginning of November and December 21 through its subsidiary MacroStrategy, and paid out approximately $42.8 million in cash. It then sold 704 of the tokens on Dec. 22 for a total of about $11.8 million, citing tax purposes, before buying another 810 of them two days later.

Matt Malley, chief market strategist for Miller Tabak + Co. Step down as CEO. This news means they don’t seem to want to do that anytime soon.”

Overall, MicroStrategy held about 132,500 bitcoins worth over $4 billion USD as of December 27th. The company paid an average purchase price of $30,397 per bitcoin.

“Given MicroStrategy’s $2.4 billion in leverage, we believe the company may have a lot of leverage over Bitcoin, and may face some liquidity risk,” Jefferies analyst Brent Thiel wrote in a note on Wednesday. Thill has an “underperform” rating on the stock and a price target of $110.

Over the years of the pandemic, MicroStrategy has become well known for its Bitcoin takeovers, largely led by Saylor. Earlier this year, Saylor stepped down from that role and now serves as CEO at the company and continues to lead its bitcoin strategy.

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MicroStrategy was trading around $120 before Saylor first announced the company’s Bitcoin purchases in 2020. The stock reached an all-time high of $1,315 in February 2021.

(Updates to include the stock’s closing price in the second paragraph.)

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Bankman-Fried May File Petition in New York Federal Court Next Week Before Judge Louis Kaplan By Cointelegraph

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Former FTX CEO Sam Bankman-Fried is set to appear in court on the afternoon of January 3 to enter a lawsuit over two counts of wire fraud and six counts of conspiracy against him related to the collapse of cryptocurrency exchange FTX, according to Reuters. mentioned on December 28, citing court records. Bankman-Fried will appear before District Judge Lewis Kaplan in Manhattan.

Judge Kaplan was appointed to hear the case on December 27 after the original judge in the case, Ronnie Abrams, Resigned herself because of connections between FTX and the law firm Davis Polk & Wardwell, where her husband is a partner. The company provided advisory services to FTX in 2021.