By Lewis Krauskopf

NEW YORK, (Reuters) – Investors weigh whether the momentum generated by the record-breaking stock market rally in the final two months of 2021 will carry on. This is a historically strong period for equities. However it may be more risky than normal this year.

The has rallied 22.6% year-to-date, its best January-through-October performance since 2013, and November and December tend to be among the strongest months for stocks.

However, this year’s end period could have more pitfalls than usual as investors prepare for the impending unwinding of $120billion-per-month Federal Reserve Government Bond buying Program that helped stock prices more than double since March 2020. A lot of investors are watching out for unusual movements in the bond market and concerns over possible inflation, along with a potential debate about tax legislation.

“If the appropriate items fall into place you could continue the seasonality of a year-end rally,” said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates in Toledo, Ohio.

American equities traditionally start a bullish month in November. Since 1945, the S&P 500 has climbed an average of 6.8% in the November-through-April period, the highest average change for any rolling six-month span, compared with an average 1.7% gain from May through October, according to Sam Stovall, chief investment strategist at CFRA.

In particular, November and December have been the S&P 500’s second- and third-best months of the year since 1950, with the index rising an average of 1.7% and 1.5%, respectively, according to the Stock Trader’s Almanac. A better-than-expected start of the earnings season helped to boost October’s benchmark index by 6.9%.

A major indicator of the Fed’s willingness to cut its bond purchasing program will be the Fed. The central bank expects to make the announcement at its next monetary policy meeting. Officials have indicated plans to reduce bond purchases as soon as November. Investors will however be watching for signs that central banks may need to cut back on borrowing.

Anu Gaggar (global investment strategist at Commonwealth Financial Network), said that markets are critically impacted by the Fed’s communications about how long-lasting this recent rise in inflation will continue.

“So far they have maintained that this is transitory, but if we see a change in the wording around that, that could potentially spook the market a little bit,” Gaggar said.

As investors track volatility in the bond markets, this has been because rates for U.S. short-term government bonds rose in response to the expectation that rising inflation would force the Fed (and other central banks) to tighten their monetary policies more aggressively. Although stocks haven’t been affected by these recent changes, some investors may find equities less appealing due to increases in Treasury yields over the longer term.

Washington’s legislation could increase the spending in infrastructure. Investors are however wary about proposals to raise levies for corporate profits, income and investments. As the House of Representatives abandoned its plans to vote on an Infrastructure bill, Joe Biden suffered a defeat.

Some prominent investors are concerned about the possibility of downside. BofA Global Research this week called for a year-end target on the S&P 500 of 4,250, about 7.5% below current levels. BofA analysts highlighted extended valuations and “near-euphoric” sentiment. There are also a variety of risks for corporate profit margins such as potential tax hikes or labor inflation.

Lancz stated that, given October’s “phenomenal stock gains”, those returns may be borrowing a bit from November or December.

Market declines were met in 2021 with quick buying. The S&P 500’s biggest drop this year – a 5.2% fall from early September to early October – was recouped in just 13 trading days.

JJ Kinahan is chief market strategist for TD Ameritrade Chicago. “The market has surprised people at every turn this past year,” he said. “Every time people leave it for dead, the buy-the-dip mentality has continued to be strong.”