Investing.com -- US equities typically stage a strong performance in December amid favorable seasonality trends.
The S&P 500 has delivered a median return of +1.5% during this month over the past 45 years, with positive results occurring 73% of the time. According to Morgan Stanley (NYSE:MS), the second half of December tends to outperform the first, with a median gain of +1.2% compared to just +0.2% in the earlier half.
This trend is also evident in smaller stocks. The Russell 2000 typically records a stronger median return of +2.5% in December, with a 76% likelihood of a positive performance.
Similar to the S&P 500, small-cap stocks tend to see a more pronounced rally in the latter part of the month, with a median return of +2.7%, compared to a slight decline of -0.5% in the first half.
Morgan Stanley points out that sentiment among corporations, consumers, and investors has shown signs of improvement in recent weeks.
Indicators like the Conference Board Consumer Confidence Index and University of Michigan Consumer Sentiment have ticked higher post-election, but optimism remains relatively subdued compared to the post-2016 election surge. These sentiment measures currently sit in the 34th percentile on a median basis since 2000, significantly below the 72nd and 74th percentiles seen one and three months after the 2016 election.
“We think incremental clarity on tariffs, in particular, will be helpful in terms of catalyzing further upside in these gauges,” strategists led by Michael J. Wilson said in a note.
Despite the positive seasonal backdrop, strategists advise caution regarding its broader implications.
“December seasonality tends to be stronger for the Russell 2000, potentially benefiting small caps near term, but it’s not a significant driver to catalyze a durable rotation, in our view,” the note states. The firm remains neutral on the small-cap versus large-cap pair.
Meanwhile, the correlation between stock performance and bond yields remains in positive territory, the bank notes, signaling that equities are responding favorably to strong macroeconomic data.
This dynamic, described as a "sweet spot" for interest rates, is supportive of valuations as the year ends.
“Yields below that range can certainly be tolerated by equities assuming the driver is Fed rate cuts in the absence of a material slowdown in growth. Yields above that range can also be tolerated if the pace of the rise in rates is measured and the driver is stronger nominal growth,” Morgan Stanley explains.