The stock market has a long history of displaying a “Santa Claus” rally during most years, leaving investors hopeful for a positive end to the year. The year 2024 saw a surge in stock prices, driven by the AI boom, making it one of the strongest years in the new millennium. However, the festive mood took a hit last week when the Federal Reserve took a tough stance on interest rates, prompting a sharp decline in indexes and leaving investors uncertain about the market’s future performance. Many are now wondering if the traditional Santa magic will help erase the recent losses and salvage what has otherwise been a remarkable year for stocks.
The latter half of December is typically a robust period for U.S. equities, with the second-highest level of activity observed during this time, as noted by Bank of America. With markets closing early on Christmas Eve and reopening after New Year’s, trading activity tends to be subdued during the holiday season. Despite this, many investors inject funds into the market, leveraging bonuses and adjusting their portfolios to optimize tax implications.
Paul Hickey, co-founder of Bespoke Investment Group, highlighted that the lack of significant corporate developments during the holidays contributes to relatively stable valuations for companies. This factor, combined with increased investment activity, has made December the second-best performing month for the S&P 500 since 1950, according to a recent analysis by broker-dealer LPL Financial.
The consistency of these holiday rallies over the years is notable, with the S&P exhibiting gains in December around 74% of the time since 1950, surpassing performance in any other month. In presidential election years, this figure rises to 83%, emphasizing the significance of December market trends. These gains typically materialize in the latter part of the month, coinciding with the reference to Santa Claus.
However, a lack of a holiday rally can be a cause for concern as past instances have hinted at impending market challenges. Market downturns during the holiday rally periods of 1999 and 2007 foreshadowed the dot-com bubble and the 2008 financial crisis, respectively. Notably, last year’s minor sell-off around New Year’s did not lead to a prolonged downturn, with the S&P recording significant gains in 2024 and nearing its fifth-best year since 2000.
Despite the Federal Reserve’s recent stance impacting market sentiment, analysts at Bank of America suggested that the cost of hedging for a year-end rally using S&P 500 options is currently at its lowest since the pandemic. This has prompted recommendations for utilizing upside hedges in SPY to safeguard gains or introduce risk-limited large-cap Tech exposure.
While the holiday season may bring lower trading volumes, retail traders should remain cautious of increased risk due to heightened price volatility. With investors seeking to adjust their positions amid the year-end festivities, price fluctuations can be more pronounced and rapid.
In conclusion, while the market navigates uncertainties introduced by recent events, investors remain hopeful for a potential.
