Monday, November 1, 2021

Path of Least Resistance

 

By Nicholas Jasinski |  Monday, November 1

Higher and Higher. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all rallied through the afternoon today to close at record highs. Not to be outdone, the Russell 2000 surged 2.7%, for its best day since late August. The small-cap index is just a tenth of a percentage point below its own all-time high, set back in March 2021.

The S&P 500 erased a loss around midday to close up 0.2%, the Dow added 0.3%, and the Nasdaq climbed 0.6%—to extend its current winning streak to six days.

After a dicey September and early October, the path of least resistance for stock indexes has again been upward in recent weeks. Today, they oscillated between negative and positive territory with no real directional drivers in play, only to rise through the final hours of trading and notch record highs.

Headlines today included the latest on a pair of spending bills winding their way through Congress and the removal of steel and aluminum tariffs imposed by the U.S. on the European Union. Earnings reports continued, with results from companies including Clorox, Franklin Resources, McKesson, NXP Semiconductors, and Simon Property Group today. Conversations on Wall Street circled around the familiar topics of transitory versus persistent inflation, companies' supply chain challenges, and what to expect from the Federal Reserve's meeting this week.

Through it all, stocks drifted higher. We've just entered what has historically been the best three-month period for the market.

The Dow and S&P 500 have each climbed an average of 3.4% during the November-December-January period, more than in any other three-month stretch of the calendar. The Nasdaq's average gain is 6.3% in that timeframe.

Barron's Jacob Sonenshine explains one major contributing factor to that historical trend:

The strong performance at year-end isn’t just happenstance. People tend to fund their investment accounts at the end of the year, which means they are essentially pumping money into the stock market. Most people contribute to their IRA accounts—all at once—at year-end, when they have a clear picture of how their finances are shaping up, says John Ham, wealth advisor at New England Investments & Retirement Group.

Then, 'in January, you get a lot of employer contributions to plans also,' Ham said.  

Tax-loss selling is another year-end phenomenon that can cause some curious moves in individual stocks. Reshma Kapadia has a screen for beaten-down stocks that could be selling candidates between now and year-end. If that pushes prices down even further than fundamentals justify, there could be buying opportunities in store. Read her report here.

 

 


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