Investors are looking forward to the end of a rough year in the stock market. Major indexes have fallen due to a slew of issues, including inflation, rising interest rates, recession fears, and geopolitical conflict. Luckily, we are getting some clarity as we move out of November. Consider these two important stock market predictions for December, and reevaluate your investment portfolio before the new year.
Prediction No. 1: Volatility will decline
Conditions are setting up to give investors a break from volatility. The stock market has faced an uphill battle all year. Valuations were near historically high levels 12 months ago, especially among growth stocks. Expensive stocks couldn't maintain high valuation ratios in the face of rising interest rates and a global economic slowdown. This was the fuel for a series of sell-offs that contributed to elevated volatility throughout the year.
Data by YCharts.
Global economic stability and growth remain a concern, but the factors contributing to stock market volatility are losing steam. Valuations are much more reasonable relative to one year ago, so investors have less incentive to sell. We're also seeing some light at the end of the interest rate tunnel.
Investors were prepared for the most recent Fed rate hike, and the impact on markets was minimal. Recent commentary from the central bank suggests it could moderate its own inflation-fighting tactics in the near future. It's hard to say exactly where rate hikes go from here, but they aren't inducing the same type of fear that we saw earlier this year.
The vast majority of third-quarter earnings have been reported by the end of November, as well. Corporate earnings reports were highly divergent last quarter. Many companies in the industrial and consumer sectors exceeded Wall Street's gloomy forecasts. Meanwhile, some major tech sector stocks were crushed due to their slowing growth and uninspiring outlook. This news contributed to volatility over the past two months. With earnings results largely behind us, there are fewer company-specific catalysts for volatility in December.
Don't expect the market to go dormant in December, but things are likely to calm down.
Image source: Getty Images.
Prediction No. 2: Retail data will move markets
Macroeconomic theory suggests that high interest rates will discourage businesses from investing in growth, which should lead to an overall slowdown in employment and corporate expansion. We're seeing this play out in real life. Recent corporate earnings and commentary from executives have revealed a clear slowdown in growth. S&P 500 companies averaged 2.2% earnings growth in the third quarter, which is the lowest level in two years.
Investors have spent the last few months digesting this news and coming to terms with a slowdown for global corporations. Consumers, on the other hand, have been less impacted. Inflation is a concern, but consumer spending data has been resilient. While some high-profile companies have announced sweeping layoffs, various employment metrics have been stable across the economy in general.
The U.S. economy relies heavily on consumer strength, so investors are closely watching the data that could signal a definitive change in the current trend. Holiday spending is an important time for assessing consumer sentiment. Some retailers issue press releases providing updates on Black Friday and Cyber Week sales. It's also common to see industry reports on early holiday shopping trends, often based on credit card transaction data or shipping volumes. These reports will complement the normal monthly indicators such as advance retail sales and consumer surveys.
In the absence of other major news -- and with extra focus on consumer strength -- expect any surprising data points to move the stock market.
