The stock market is hoping for a Santa Claus rally to end the year on a high note after losing steam in recent weeks. The benchmark 10-year Treasury yields have hit their highest level in over six months, but there is still cautious optimism among investors. In December, 8 of the 11 S&P 500 sectors have been in negative territory.
Analysts note that the S&P 500 is trading on forward earnings estimates that are significantly above historical averages, indicating uncertainty and anticipation. Last Friday, Wall Street saw significant gains and the dollar softened after cooling inflation data provided relief. This helped investors look beyond immediate threats of a government shutdown and fresh tariff threats from the U.S. President-elect.
Investors will be closely watching market movements this week, hopeful for a year-end rally that could brighten the economic outlook for 2025. Historically, December is the second-best month in a U.S. presidential election year for the Dow Jones Industrial Average and S&P 500. On average, the two indexes gain 1.3% and 0.8% during such years.
For the Nasdaq Composite, presidential election year Decembers are usually the fifth-best of the year, with the tech-heavy index rising an average of 0.9%. However, this time around, the Dow is on track for a losing month, down more than 5%. The S&P 500 is down more than 2% in December, while the Nasdaq Composite is the sole index set to close out the month with a gain, rising nearly 1% so far.
Santa Claus rally expectations rise
The bulk of gains in December usually come in the back half of the month when a Santa Claus rally and low trading volumes could give this year’s market run one final push toward the finish line. “It’s a pretty good setup,” said Eric Clark, portfolio manager at the Rational Dynamic Brands Fund.
The Santa Claus rally could also show investors what to expect heading into the first quarter of next year. It is a bullish indicator if it materializes and a bearish one if it does not. Katie Stockton, founder at Fairlead Strategies, said that a failure to “recover pretty dramatically” by Friday’s close would trigger intermediate sell signals.
“If we don’t get a rally, given how oversold we are, that is even more telling to me, and probably will beg for a little bit more caution and defensiveness in a portfolio, maybe even holding a little bit more cash,” Clark said. The Santa Claus trading window, a seven-day period starting on December 24, is set to bring a stock market rally this year, according to experts. Historically, the S&P 500 gains 1.3% during this period and is positive 79% of the time.
Ryan Detrick, the chief market strategist at Carson Group, believes this year’s holiday period will once again deliver a year-end rally for the stock market. He cites several reasons, including December’s historical performance, the absence of major news during the holidays, and signs that stocks are currently oversold. “Don’t stop believing in a Santa rally just yet,” Detrick encouraged.
The market’s historical performance and the absence of major news during the holidays suggest that a year-end rally is likely. Investors should remain optimistic as the Santa Claus trading window approaches.
