Federal Reserve Pause’s Interest RatesHalloween may be over but that doesn’t mean it isn’t still scary on Bay Street and Wall Street. On July 27 the S&P 500 hit a 52-week high of 4,240, putting it up 19.5% year-to-date. The big moves defied logic, with inflation stubbornly high and interest rates still on the rise.

But then stocks started to slide in August, which isn’t a total surprise. August typically sees lower trading volume as traders and investors go on vacation, which can lead to bigger price swings.

August can be a bad month, but that’s nothing compared to September, which is historically, the worst trading month of the year for stocks. Over the past 10 years, the S&P 500 has fallen, on average, one percent in September.

Then there’s the so-called October effect. Bad things happen on Wall Street in October—the Bank Panic of 1907, Stock Market Crash of 1929, and Black Monday 1987.

Collectively these three months saw the major North American indexes give up major ground. On October 27 the S&P 500 was in correction territory, down 10.9% over its recent July highs. On October 26, the tech heavy Nasdaq hit a low of 12,543— down 13.1% over its summer peak, which also put it into correction territory. The Toronto Stock Exchange, or TSX, narrowly missed falling into correction territory, hitting an intra-day low of 18,692 on October 27, down 9.5% from its recent September highs.

What’s Next for Stocks After the U.S. Stock Market Correction?

Well, the correction was short lived. North American stocks rallied higher after the U.S. Federal Reserve said on November 1 that it decided to pause interest rates. This marked the second meeting in a row in which the U.S. central bank opted to hold its benchmark lending rate in a target range of between 5.25% to 5.5%.

Federal Reserve Chair Jerome Powell said that the central bank would continue to monitor the economy, noting that while the economy has moderated, inflation is still too high at 3.7%, and left the door open to additional rate hikes.

Still, investors and analysts are increasingly optimistic that perhaps, the Federal Reserve is done hiking interest rates for this cycle. Over the opening two days of November, the S&P 500 rallied 2.5%, the Nasdaq climbed 3.0%, while the TSX increased an even more impressive 3.4%.

This has also led some economists to predict that the stock market will rally in the fourth quarter and into 2024.

Why Could the S&P 500 Experience a Year-End Rally?

Despite the S&P 500 and Nasdaq falling into a correction there are numerous reasons why stocks could fall further, but there are some compelling reasons why stocks could rebound by the end of the year, stretching into 2024.

One Wall Street analyst has a year-end 2023 target for the S&P 500 of 4,400 and 4,650 for the end of 2024. This points to upside gains of two percent and eight percent respectively. How will we get there? And could the S&P 500 even surpass those levels?

He cites the end of the Feds tightening cycle and notes that historically, the S&P 500 typically rallies 14% over the 12 months after the Fed’s final rate hike.

The taming of inflation should lead to lower interest rates and result in more of us having additional disposable income. This should help drive sustainable corporate earnings growth.

And, getting back to seasonal trends, as noted above, stocks decline in August, September, and October. But November and December are two of the strongest months of the year. On average, the S&P 500 gains 1.5% in November and 1.2% in December.

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Will Canadian and U.S. equities experience a rally in the fourth quarter of 2023? Despite headwinds, which include higher bond yields, still too high inflation, geopolitical tensions in the Middle East, and growing tensions between the U.S. and China/Russia/Iran, there is growing consensus that stocks will stage a comeback over the last three months of 2023.

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