With Thanksgiving behind us, our thoughts now turn to Christmas. Aside from the spiritual aspects of the holiday, the financial stakes are high. Below, I explain why the odds of a year-end surge in the overall stock market, a seasonal phenomenon known on Wall Street as a “Santa Claus rally,” are good this year.

Every year, the culture warriors decry a supposed “War on Christmas.” As I’m deafened by Christmas carols everywhere I go, I’m reminded that the notion is absurd. Three quarters of U.S. gross domestic product is comprised of consumer spending, and three quarters of that spending occurs during the Thanksgiving-Christmas holidays.

Can we believe in the Santa rally this year? Yes, Virginia, we can. Let’s look at the backdrop.

Santa baby…

As inflation cools and the Federal Reserve sends signals that it might slow the pace of tightening, the stock market has strongly rebounded.

The Dow Jones Industrial Average has jumped nearly 20% since its late-September low, to approach the threshold that would represent its exit from a bear market.

The S&P 500 has rallied nearly 13% from its October low, whereas the tech-heavy NASDAQ has been recovering but remains weighed down by rising rates, which disproportionately hurt growth stocks.

The period between Thanksgiving week and New Year’s historically marks a bullish year-end sprint for U.S. stocks. The momentum this year seems to have legs, as jobs growth and corporate earnings stay on track, consumers continue to spend (albeit judiciously and with an eye toward bargains), and the inflation beast starts to lose its bite. Last week’s rise in equities was an auspicious sign (see chart).

There are many theories as to why the calendar effect of a Santa rally is so reliable.

Some analysts attribute the phenomenon to low trading volume, as asset managers take the week after Christmas as a holiday vacation. Others suggest the outsized buying comes from managers attempting to position themselves with increased bullish exposure as the market starts a new fiscal year.

Make no mistake. The Grinches could still come along to steal the rally. Risks remain, including the increasingly brutal Russia-Ukraine war, the persistent pandemic (especially in China), and still-elevated inflation. But right now for investors, it’s beginning to look a lot like Christmas.

Bonds for ballast and income…

Through it all, always stay diversified, across asset classes and geographical regions. Markets rise and fall, but over the long run a well-diversified portfolio provides the best gains. Which brings me to bonds.

Read This Story: The Name Of The Game Is Bond…Treasury Bond

Bonds bring diversity to your portfolio because of their low correlation to other asset classes.

The Fed this year has been boosting interest rates at a pace not witnessed since the dark days of hyper-inflation in the 1970s and early 1980s. The rise in the short-term fed funds policy rate, which now hovers at 3.75%-4.0%, caused bond prices to crater, as investors priced in expectations for higher rates. Accordingly, bonds underwent their largest sell-off since records started in 1926.

As we get closer to the end of the Fed’s tightening cycle and a peak in yields, it’s likely that much of the adjustment in bond prices is behind us. That spells appealing opportunities in fixed-income asset classes across bond maturities, as higher yields increase return potential.

With rates higher now than at the beginning of the year, bonds are positioned to once again provide beneficial diversification to portfolios. If the economy lapses into a recession as feared, higher-quality bonds can function as a buffer and generate income during economic turbulence.

The degree of fixed income you need depends on your age. The closer you get to retirement, the greater weighting you should place on fixed-income investments such as bonds.

The week ahead…

Keep an eye on these economic reports scheduled for release in the coming days. The docket is crowded this week:

S&P Case-Shiller U.S. home price index, consumer confidence index (Tuesday); ADP employment report, real GDP revision, job openings, job quits, pending home sales, Fed Chair Jerome Powell’s speech at the Brookings Institution, Beige book (Wednesday); initial jobless claims, the Personal Consumption Expenditures (PCE) Price index, consumer spending, S&P U.S. manufacturing PMI, ISM manufacturing index, construction spending, motor vehicle sales (Thursday); unemployment rate, average hourly earnings, and labor force participation rate (Friday).

The big story will be the latest reading of the PCE, which is the Fed’s preferred inflation gauge. Further confirmation that inflation is easing would be a shot of adrenaline for equities.

In the meantime…are you looking for a steady source of income that’s impervious to monetary policy and the rate of inflation? Consider the advice of my colleague Jim Fink.

Jim Fink is chief investment strategist of Options for Income, Velocity Trader, and Jim Fink’s Inner Circle. Jim’s investment methods have enabled him to take his life’s savings of $50,000, turn the amount into $5 million, and retire early at age 37.

Jim has been sharing his trading secrets for over a decade, giving regular investors not just one, but two different opportunities to get paid every single week. In fact, while the market tanked several times over the last few years, he hasn’t closed out a single losing trade.

To learn more about Jim Fink’s money-making methods, click here.

John Persinos is the editorial director of Investing Daily. You can reach John at: mailbag@investingdaily.com

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