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Last month witnessed a surge in stock values, marking five consecutive weeks of gains, helped by investor belief that the Fed might begin cutting interest rates early in the coming year. This optimism, however, has recently led to a decrease in Treasury yields, despite Fed Chair Jerome Powell's resistance to suggestions of halting rate increases.

Still, talks are now doing rounds that the latest rally in stocks and bonds has been excessive. Against this backdrop, December has unfolded for investors. Historically, Wall Street tends to perform strongly in December. Specifically, the S&P 500 has exhibited positive returns in December 74% of the time since 1928, which is more frequently than any other month.

This trend is even more pronounced when the S&P 500 has had a strong performance in the first 11 months of the year. According to moneychimp.com, a consensus carried out from 1950 to 2022 has revealed that September ended up offering positive returns in 54 years and negative returns in 19 years, with an average return of positive 1.31%.

In a nutshell, the current investing backdrop is mixed. Many analysts are of the view that the economy is resilient enough to withstand higher rates for longer. There is no major chance of a 25-bp Fed rate hike before March 2024, per CME FedWatch Tool. Investors thus can be assured of a smooth sailing for the stock market. Then again, the awesome relief rally in November may cause a correction in December.

Against this backdrop, below we highlight a few ETFs that can be tapped for gains in the current month.

ETFs in Focus 

Invesco S&P SmallCap Consumer Discretionary ETF (PSCD) – Zacks Rank #2 (Buy)

Americans have spent considerably this year over the five-day Thanksgiving weekend lured by significant discounts across various categories, including beauty products, toys and electronics. The month of December includes the heart of the holiday season. And we expect consumers to shop discretionary items in the Christmas month (read: Thanksgiving Weekend Sales Hit a Record: ETFs to Tap).

Defiance Hotel, Airline, and Cruise ETF (CRUZ)

The Conference Board stated that its consumer confidence index increased to 102.0 in November from a downwardly revised 99.1 last month. The consumer confidence index advanced more than analysts’ expectations of 100.9. The Expectations Index— based on consumers’ short-term outlook for income, business, and labor market conditions— rose to 77.8 in November from 72.7 in October.

The greater the confidence households have, the more inclined they are to spend money. This is especially true given the all-important holiday season is underway (read: ETFs to Play Amid Rebounding Consumer Confidence).

Pacer US Small Cap Cash Cows 100 ETF (CALF) – Zacks Rank #3 (Hold)

Small-cap stocks have cheaper valuation than larger ones. However, many investors are believing that markets have priced in the economic slowdown fears for 2024, if there is any. Hence, investors with a strong stomach for risks can try out small-cap stocks that have strong free cash flow yields (read: Are Small-Cap ETFs Too Cheap to Ignore?).

Vanguard High Dividend Yield ETF (VYM) – Zacks Rank #1 (Strong Buy)

The underlying FTSE High Dividend Yield Index which is consists of common stocks of companies that pay dividends that generally are higher than average. Dividends offer a safer exposure in an uncertain investing backdrop. The fund yields 3.11% annually and charges 6 bps in fees.

First Trust NASDAQ Cybersecurity ETF (CIBR)

Given the recent surge in the adoption of AI technology, the need for cybersecurity becomes increasingly evident. Cyberattacks are on the rise as an increasing number of companies across various sectors are integrating generative AI and other aspects of technology into their daily operations. One notable area of growth in cybersecurity spending is in cloud security products and services, underscoring the growing importance of securing cloud-based systems and data. Increasing acquisition activity in the sector also benefits the fund.

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