New York (Reuters) - As the year 2023 draws to a close with substantial gains, Wall Street is eagerly anticipating the annual phenomenon known as the Santa Claus Rally to propel markets to new record highs.

With the S&P 500 already up more than 4% in December alone and having achieved a remarkable 24% rise throughout the year, the benchmark index now stands just 1% away from reaching its all-time high. Furthermore, it is on track to secure its eighth consecutive positive week, showcasing the enduring confidence among investors.

Based on historical trends, there is an optimistic belief that this momentum will continue in the short-term. Referred to as the "Santa Claus Rally," the last five days of December and the first two days of January have typically seen an average gain of 1.3% for the S&P 500, according to data from the Stock Trader's Almanac dating back to 1969. This buoyancy is often attributed to a combination of tax-related sales, end-of-year buying, and the general hopeful atmosphere surrounding the holiday season.

In the present year, optimism is particularly high due to recent developments. Earlier this month, the Federal Reserve surprised investors by indicating that its long-standing monetary policy tightening is likely at an end, and projecting possible rate cuts into 2024, following encouraging signs of moderating inflation. Friday's data supported this trend, revealing a further slowdown in U.S. inflation as measured by the personal consumption expenditures (PCE) price index, which fell below 3% in November.

"The narrative will continue to be about the Fed making a dovish pivot," commented Angelo Kourkafas, a senior investment strategist at Edward Jones. "That provides support for markets and sentiment, and that is unlikely to change next week."

Market observers have noticed a robust appetite for stocks among investors. In a recent report, BofA Global Research noted that clients of Bank of America purchased a net total of $6.4 billion in U.S. equities during the latest week, reflecting the highest weekly net inflow since October 2022.

Furthermore, retail investors have shown a significant increase in buying activity over the past four to six weeks, as highlighted by Vanda Research. The company noted that individuals have redirected their purchases toward riskier securities after aggressively pursuing higher yields in previous months, and predicted this trend will continue into the new year as yields remain under pressure.

Confirming this positive sentiment, Ned Davis Research recommended a shift of an additional 5% from cash to equities, citing supporting indicators that measure stock market breadth. This move will increase the firm's equity allocation to its maximum level in its portfolio models.

However, it is important to note that trading volumes are expected to be thin for the rest of the year, as investors take breaks for the holidays. This leaves stocks particularly vulnerable to unexpected news or large trades, as seen earlier this week when the S&P 500 experienced a sudden downturn, closing down 1.5% on Wednesday. The low trading volumes, activity in zero-day options, and institutional investor trades were attributed as factors behind the abrupt move, following an extended period of stock gains.

Nevertheless, the market could receive a boost next week as investors heavy in cash aim to seize opportunities presented by the ongoing equity rally, driven by the fear of missing out (FOMO) phenomenon. Kevin Mahn, President, and Chief Investment Officer at Hennion & Walsh Asset Management, expressed his belief that while the market may have slightly exceeded expectations with its rally so far, it could still see further upward movement due to the FOMO trade.

In conclusion, Wall Street remains hopeful that the Santa Claus Rally will deliver record highs as 2023 concludes on a strong note. With robust gains, optimism fueled by the Federal Reserve's dovish pivot, increased buying activity from investors, and the potential for a FOMO-driven surge, the market is poised for an exciting end to the year. However, thin trading volumes caution that unexpected news or large trades could introduce volatility into the market.