The stock market is anticipating a Santa Claus rally to conclude the year positively, especially after losing momentum in the last few weeks. The 10-year Treasury yields have reached their highest figures in more than six months, yet investors express a degree of cautious optimism. During December, 8 out of the 11 S&P 500 sectors have fallen into negative territory.
Experts observe that the S&P 500 is currently trading based on forward earnings projections that significantly exceed historical norms, pointing to uncertainty and speculation. Last Friday, significant gains were noted on Wall Street, while the dollar eased after favorable inflation statistics offered some relief. This encouraged investors to look past the immediate concerns of a government shutdown and new tariff threats from the incoming U.S. President.
This week, market fluctuations will be under careful scrutiny by investors, who are hopeful for a year-end rally that may enhance the economic outlook for 2025. Traditionally, December is the second most advantageous month in a U.S. presidential election year for both the Dow Jones Industrial Average and the S&P 500. On average, during such years, the two indexes improve by 1.3% and 0.8%, respectively.
For the Nasdaq Composite, December in a presidential election year typically ranks as the fifth-best month, with the tech-heavy index gaining an average of 0.9%. However, this season, the Dow appears headed for a losing month, having dropped by over 5%. The S&P 500 is down more than 2% this December, while the Nasdaq Composite remains the only index projected to finish the month with a gain, currently rising by nearly 1%.
Increased Expectations for a Santa Claus Rally
Most of the gains in December generally occur in the latter half of the month when a Santa Claus rally, coupled with low trading volumes, could propel this year’s market performance toward a strong finish. “It’s a favorable setup,” remarked Eric Clark, portfolio manager at the Rational Dynamic Brands Fund.
The potential Santa Claus rally could also provide insights for investors regarding the first quarter of next year. Its occurrence would be a bullish sign, while its absence could signal bearish trends. Katie Stockton, founder at Fairlead Strategies, mentioned that not achieving a “dramatic recovery” by the close on Friday could trigger intermediate sell signals.
“If we don’t experience a rally, given how oversold we are, that would be particularly revealing to me, likely leading to increased caution and defensiveness in a portfolio, potentially even holding more cash,” Clark stated. The Santa Claus trading period, which spans seven days starting from December 24, is expected to yield a stock market rally this year, according to analysts. Historically, the S&P 500 sees a 1.3% gain during this timeframe and remains positive 79% of the time.
Ryan Detrick, chief market strategist at Carson Group, is optimistic that the holiday period will bring another year-end rally in the stock market. He references several factors, including the historical performance of December, the lack of major news during the holidays, and indications that stocks are currently oversold. “Keep the faith in a Santa rally alive,” Detrick encouraged.
The market’s historical trends, along with the lack of significant news during the holiday season, imply a likely year-end rally. Investors should maintain a positive outlook as the Santa Claus trading window draws near.
