With Thanksgiving already past and Christmas shopping in full swing, it’s easy to get swept up and forget about the stock market. However, avid traders know that December is actually pound for pound the best month for the stock market. According to Reuters:
“The S&P 500 has gained an average of 1.6% during December, the highest average of any month and more than double the 0.7% gain of all months, according to data from investment research firm CFRA. September, meanwhile, is the worst month of average for stocks, with a 0.7% average decline.”
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And despite “tax loss harvesting” bringing fear into the hearts of bulls, the last five trading days of December and the first two of January result in positive returns ¾’s of the time. It’s part why the phrase “Santa Claus Rally” has become so ubiquitous.
However, this year, Santa’s going to have a few extra challenges in his way if he is to bring about bullish stock market returns for the month of December.
Here are 5 December dates where stock market bulls are praying for a Christmas miracle.
December Economic Calendar: Stock Market Dates to Know
December 2, Friday — The November Jobs Report
With all eyes on inflation, traders can’t forget that the Fed has a dual-mandate — price stability and a steady, sustainable labor market. In order to follow through with cutting back the pace of its rate hikes, the Fed will need to see the labor market soften.
That means this is another case of “bad news is good news” — less jobs than are anticipated would be welcomed here. Currently, the expectation is a gain of 200,000 jobs during the month of November — compared to 261,000 in October.
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December 4, Sunday — OPEC+ Meets
A key piece of not only American inflation, but the global fight against inflation is the price of oil and gas. OPEC+, or the Organization of the Petroleum Exporting Countries, is a key piece of this. The coalition (a literal cartel) will be meeting over the weekend to talk about production.
Why that matters: Last time they met, they cut production in an effort to raise the price of oil, or at least give it a floor.
It didn’t work.
The price of oil has continued to fall, and currently trades below the level that it traded at when OPEC+ cut production. If OPEC+ opts to continue cutting production, that could prove to be another obstacle in the path toward inflation reduction.
December 9th, Friday — Producer Price Index (November PPI)
The Producer Price Index, or PPI, is another sleeper-event that most people forget to watch out for. While the CPI gets all the hype, the PPI is considered to be the Fed’s preferred inflation gauge. Fed officials believe that the PPI is a better measure of consumer spending habits than the CPI.
What is the PPI?
According to Investopedia,
“The Producer Price Index (PPI) measures the average change over time in the prices domestic producers receive for their output.
It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category. The index is published monthly by the U.S. Bureau of Labor Statistics (BLS).
The PPI is different from the consumer price index (CPI), which measures the changes in the price of goods and services paid by consumers.”
Essentially, the CPI looks at the base-level consumers, and the PPI looks at the top-level producers.
In an environment where we want inflation to subside, a higher than expected PPI reading is good for the dollar, and bad for stocks. A lower than expected PPI reading is bad for the dollar, and good for stocks.
December 13th, Tuesday — US November CPI Report
While the PPI may be the Fed’s preferred inflation gauge, the CPI is unquestionably the market’s favorite inflation gauge. The stock market has seen some incredible moves on the release of CPI surprises — both bullish and bearish.
Bulls will be hoping for signs that inflation has peaked, or better yet, if it’s starting to subside. If the CPI can show a below-expectation reading, then it’s possible that the Fed follows through with what it was hinting at during the last FOMC meeting — a slower pace of rate hikes as it evaluates the impact of what it has already done.
December 14th, Wednesday — The Grand Finale: FOMC
All four of the dates above lead up to this one. The PPI, the CPI, the Jobs report, and the OPEC+ meeting all give the Fed a picture of what they must do during this meeting — the last one of the year. The FOMC, like the CPI, has generated powerful market moves, and typically comes alongside a hefty serving of high IV options.
As it stands, the market expects an increase of 50 basis points. A basis point is a percentage figure, so 0.50% is what we mean when we say 50 basis points. A different number, or a change in the expected number, will almost certainly move the stock market.
During this meeting, aside from getting the Fed’s rate decision, we’ll get Jerome Powell’s speech. The speech is often of even more importance for the market than the rate decision — it illustrates where he and the Fed stand on inflation, the recent economic data, and the path forward. Mentions of the “dot plot,” which is a chart of where the Fed believes rates will go over the coming months, are highly likely.
Lastly, the previous meeting brought about a new sort of message for the Fed — it isn’t about how fast we move, but how far we go. That is to say, even if we see a slowing in the pace of rate hikes, the new question we’ll be focusing on is “where will we end up?” As it stands, the market expects roughly 5% in 2023.
Any jostling higher would be decidedly negative for the market, as 5% is already substantially higher than where we ultimately expected rates to go at this time last year. Simultaneously, any jostling lower would be a tailwind for the market. Helping to ease concerns of tight monetary policy would in particular be a positive for growth stocks, who are the most battered by the recent breakneck rate hikes that the market has been forced to endure.
The Bottom Line
With the VIX at roughly 22, options are pretty cheap right now relative to the yearly average. With these 5 events coming up fast, there are bound to be ample trading opportunities found inside the options market.
After these events, we’ll see the kickoff of earnings season in January, and the entire cycle of inflation data -> FOMC rate hike decision will start up once again.
Our advice: Take it one day at a time. Stay disciplined. And if you’re going to trade, trade smarter.