Will the Santa Claus Rally Breathe New Life into Falling Stocks?
December has brought investors an unfavorable return in what has otherwise been a strong year for U.S. stocks. As they await a late-2024 pick-me-up, the S&P 500 remains up over 23% for the year despite its recent stumble, reflecting the market’s overall strength.
For those on Wall Street, many have seen a strong year-end historically, with the “Santa Claus Rally” offering potential gain. Since 1969, according to the Stock Trader’s Almanack, the last five trading days of the year and the first two of the next have averaged a 1.3% rise in the S&P 500. However, the potential headwinds will keep the investors cautious toward the rally as the year winds down.
December markets influenced by Fed
It is seen that the S&P 500 declined heavily in a day since the Fed indicated fewer interest-rate cuts than expected in 2025, surprising investors. Market conditions seem shaky underneath, with eight of the 11 S&P 500 sectors losing for December. And the equal-weight S&P 500, the average index stock, has been down 7% for the month. These challenges reflect broader market challenges as investors weigh the Fed’s stance on future rate policies.
Addition of valuation pressure
With Treasury yields breaking higher at the end of the year, stocks grow in worry for Matt Maley of Miller Tabak. Benchmark 10-year yields surged to 4.55 percent Thursday, their highest at least since mid-August. As the S&P 500 trades at 21.6 times forward earnings, a level far above the historical average of 15.8% the spurt in yields might weigh even more on equity valuations. Investors are getting spooked about how such higher yields are going to affect the prices of those stocks.
Market indicating mixed signals
Also, by the year-end, Matt Maley stated that investors face reality: the stock market has gotten over its cup. The Fed will not feed them as they had envisioned. Chuck Carlson sees a positive to this week’s pullback because it withdrew some of the excessive optimism that may set a rebound in the market. Still, he warns that more declines could disrupt the Bull Run. “Market conditions have to be watched closely,” he adds.
In general, a strong Santa Claus period the first five trading days of the year, the overall January performance usually determines if it’s going to be a good year. As the sign has been historically good when strong, this year closes higher than 90% of the time. However, Carlson warns that seasonal strength may have begun a little too soon because the S&P 500 rose 5.7% in November largely because of Donald Trump’s victory in the presidential election held on November 5.
Megacaps lead to narrow market moves
Although Carlson reported that the market had a great year, the rally was already seen in November rather than December. However, the narrowing rally may suppress the optimism of investors over the holiday.
Also, many of the megacap stocks have been performing pretty well this December. In fact, Tesla is up about 26%, while Alphabet surges above 12%. Broadcom advanced 35% as well, due to a robust demand forecast for its specialised AI chips, bringing a market value in excess of $1 trillion. Indeed, this is a pretty concentrated rally: just a few top stocks drive this month’s market gain.
Cautious weak market signals
Market gains are becoming rarer, as the S&P 500 stocks advancing are now fewer than those declining for 13 consecutive sessions, the longest such losing streak since 2012. This suggests weakness in the broader market, a reason for caution when considering buying into the dip.
However, it is seen that the share of S&P 500 stocks trading above their 200-day moving averages contracted to 56%, or the lowest level of this year, according to Adam Turnquist of LPL Financial. He recommended waiting for the selling on Wednesday to build better support and momentum before buying the dip. That caution betrays some possible dangers in the current market circumstances.
Winding Up
Although the S&P 500 has done well in December, its weakness last month speaks to mixed messages: Fed policy moves, Treasury yields, and valuation pressures. In fact, even though the traditional Santa Claus Rally would look for history to support a gain into year-end, broad weakness and diminishing gains through mega cap names weigh on this conclusion.
Optimism remains, and rebounding should start early next year. However, one has to be careful because seasonal strength will not be enough to mitigate current challenges. The investors should watch closely at the momentum of the market and the participation before doing anything because overvaluation and volatility could influence the recovery of the upcoming year 2025.
