With 2024 drawing to a close, Wall Street is poised for what many hope will be the anticipated "Santa Claus Rally." This term describes the stock market's tendency to rise during the final trading days of December and the first two trading days of January. Historically, this rally has been marked by significant gains, with the S&P 500 averaging returns of about 1.4% during this period, according to Investopedia.
Year-to-date, the S&P 500 Index has surged approximately 24%, putting it in good stead as it heads toward the end of the year. Nonetheless, recent weeks saw the SPDR S&P 500 ETF Trust (SPY) experiencing a 3.3% drop over just five trading days, primarily due to less-dovish cues from the Federal Reserve. Investors are now left wondering: will the rally gain momentum as the year wraps up?
The historical backdrop of the Santa Claus Rally reveals it has occurred roughly 80% of the time since its inception, typically yielding positive returns. Factors such as investor optimism, increased institutional activity, and the strategic rebalancing of portfolios prior to year-end often pump up equity prices. During the holiday season, optimism tends to flourish, as evidenced by improved consumer spending and retail projections, factors viewed as reinforcing support for the rally.
The last five trading days of December and the first two days of the new year have often proved to be the most lucrative for U.S. equities, particularly during presidential election years. Bank of America recently pointed out the potential for the current rally to kick off if the Fed aligns with market expectations, which include anticipated interest rate cuts.
Interestingly, analysts have spotlighted exchange-traded funds (ETFs) likely to benefit from the rally, particularly the tech-centric Roundhill Magnificent Seven ETF (MAGS). This fund, which includes major players like Tesla, Amazon, Alphabet (Google), Meta Platforms (Facebook), NVIDIA, Apple, and Microsoft, has reached significant market valuations exceeding $18 trillion, reflecting strong investor confidence.
Federal Reserve policy remains a key talking point as investors await clear signals on upcoming rate cuts. The CME FedWatch Tool indicates there's a whopping 99.1% chance of the Fed cutting rates by at least 25 basis points at their upcoming meeting. This sentiment bolsters expectations for the markets, especially considering December is historically the second-best month for equities, providing more optimism for the Santa Claus effect to take hold.
While the economic indicators are promising, caution abounds across the trading floors. Observers note the significant recent fluctuations and segments of the market slipping, like the Dow Jones Industrial Average, which is currently facing its longest losing streak since 1974. "It's been the worst downturn for the Dow since summer, but history suggests outcomes tend to reverse themselves after periods of selling, particularly before the year's end when the Santa Claus phenomenon is observed," stated analysts from Stock Trader's Almanac.
Investors are intensely monitoring upcoming economic data releases. The key report on November's retail sales is eagerly awaited and scheduled for release before the Federal Open Market Committee (FOMC) concludes its meeting. A strong report could reinforce market resilience, maintaining bullish trends heading toward year-end.
Polls are also actively gauging investor sentiment toward different potential beneficiaries of the expected rally, particularly within the Magnificent Seven category. A recent Benzinga poll revealed most respondents believe NVIDIA could lead the charge if the Santa Claus rally occurs, followed closely by Tesla and Amazon reflecting heightened expectations for these stocks among investors. The near-consensus view indicates confidence exists for the potential gains these firms might realize as the market barrels toward 2025.
Yet this has not come without skepticism. Analysts point out potential headwinds, including rising Treasury yields and the looming possibility of political turmoil over budget discussions and government shutdowns, which may challenge the otherwise cautiously optimistic mood on Wall Street. "The situation is complicated; there are immediate threats to this rally and the broader equity market leading to the new year,” noted Chief Market Strategist, Anthony Saglimbene. “If the Fed fails to deliver what the market expects or sentiments shift due to political disruptions, we might see volatility creep back again.”
Despite these concerns, the potential for the Santa Claus rally looks optimistic. With economic stability suggested by GDP growth figures and consumer spending trends, Wall Street seems primed to hope for holiday-driven market boosts, put to the test by Fed decisions and performance indicators leading up to the year’s final days. Whether St. Nick will drop off more than just coal, the markets await his arrival eagerly.
