In December, the S&P 500 index has risen by more than 4%, and by 24% over the year, bringing it within 1% of reaching a new historical high. The benchmark index is also on track for its eighth consecutive positive week.

Historical trends suggest this momentum is likely to continue in the short term. The end of the year is typically a period of stock growth, known as the "Santa Claus Rally."

According to data from the Stock Trader's Almanac since 1969, the S&P 500 index has averaged a 1.3% gain during the last five days of December and the first two days of January. This increase is attributed to various factors, including pre-New Year purchases, post-tax sale activities, and general holiday optimism.

This year, optimism is high. Early in December, the Federal Reserve signaled an end to its historically tight monetary policy, projecting rate cuts in 2024, following signs of slowing inflation. Recent data confirmed this trend, showing that the annual U.S. inflation, measured by the Personal Consumption Expenditures (PCE) index, slowed further below 3% in November.

"History will still be about the Fed's 'dovish turn'," said Angelo Kourkafas, a senior investment strategist at Edward Jones. "This supports the markets and sentiment, and the situation is unlikely to change next week."

Investors have recently shown strong interest in stocks. Clients of BofA purchased U.S. stocks on a net basis for $6.4 billion in the last week, the largest weekly net inflow since October 2022, according to a BofA Global Research report on December 19.

Meanwhile, a "sharp rise" in purchases among retail investors has been observed over the last four to six weeks, according to a Vanda Research report on Wednesday.

Continued Interest in Riskier Assets and Market Outlook for 2024

In recent months, investors' aggressive pursuit of higher yields has shifted their focus towards riskier securities, according to a note from Vanda. This trend is expected to continue into the new year, as yields remain under pressure.

Ned Davis Research, referencing indicators that measure the breadth of the stock market, advised investors this week to shift an additional 5% from cash into stocks, bringing stock allocations to their maximum level in portfolio models.

Trading volumes are expected to be modest until the end of the year, as investors take holidays, making stocks particularly sensitive to unexpected news or large transactions.

An example of excessive movements occurred earlier this week when the S&P 500 index sharply dropped by 1.5% in one day. Market participants attributed this to a combination of low volumes, zero-day option activity, and institutional investor transactions after a prolonged period of stock growth.

Kevin Mann, president and chief investment officer of Hennion and Walsh Asset Management, mentioned that investors with surplus funds might seek to buy stocks next week due to "fear of missing out" on the stock rally, often referred to as "FOMO."

In November, U.S. prices fell for the first time in over three and a half years, leading to further inflation falling below 3%. Food prices decreased by 0.1%, and energy prices dropped by 2.7%. Over the 12 months leading up to November, the PCE price index increased by 2.6%, down from 2.9% in October. Economists had forecasted the PCE price index to remain unchanged monthly and to increase by 2.8% annually.

Excluding volatile food and energy components, the PCE price index rose by 0.1% in November, mirroring October's growth.

The so-called core PCE price index increased by 3.2% annually, the smallest rise since April 2021, after rising by 3.4% in October. The Federal Reserve monitors PCE price indicators to achieve its 2% inflation target.

Wall Street stocks traded higher. The dollar fell against a basket of currencies. Prices for U.S. Treasury bonds rose.

Last week, the U.S. Central Bank kept rates stable, and policymakers in new economic forecasts indicated the end of two years of historic monetary tightening, leading to a decrease in borrowing costs in 2024. Since March 2022, the Fed has raised the federal funds rate by 525 basis points to the current range of 5.25%-5.50%.

GDP growth estimates for the fourth quarter vary from 1.1% to 2.8% annually. In the third quarter, the economy grew by 4.9%.

"The U.S. economy is in good shape heading into 2024," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "There will be no recession in 2024."