Where’s Santa? This could be why he has not yet appeared!
Following the U.S. presidential election on November 5, 2024, where Donald Trump secured victory, U.S. stock markets experienced a significant surge. The S&P 500 and NASDAQ Composite reached record highs, reflecting investor optimism about potential pro-business policies and anticipated tax cuts.
However, as the year drew to a close, trading volumes declined, a typical pattern during the holiday season when many market participants were on vacation. This reduction in activity can lead to increased volatility and exaggerated market movements, as the usual liquidity that stabilizes prices is diminished.
Despite the post-election rally, the anticipated “Santa Claus rally”—a typical rise in stock prices during the last five trading days of December and the first two of January—failed to materialize. Instead, the S&P 500 and Dow Jones Industrial Average posted their largest monthly losses since April, declining 2.1% and 5.2%, respectively.
The absence of the Santa Claus rally can sometimes signal potential market weakness. Historically, when this rally doesn’t occur, it may precede a downturn in the early months of the New Year.
Given the current context—light trading volumes due to the holiday season, the lack of a year-end rally, and the significant post-election surge—the recent market pullback could be indicative of a more substantial correction. However, it’s essential to consider other factors, such as upcoming economic data releases and Federal Reserve policy decisions, which will play crucial roles in determining market direction as traders return in January.
In summary, while lighter trading volumes during the holidays can lead to increased volatility and potential pullbacks, the absence of the Santa Claus rally this year, following a significant post-election surge, may suggest the possibility of a more substantial market correction. Investors should remain attentive to economic indicators and policy developments in the coming weeks.
My Take: What Does This Mean Going Forward?
The absence of a Santa Claus Rally so far (we still have two more days left) could lead to a self-fulfilling prophecy. Historically, a Santa Claus Rally—defined as a rise in stock prices during the last five trading days of December and the first two trading days of January—has occurred over 75% of the time since 1950. However, it has yet to materialize this year.
With Christmas and New Year’s Day falling on Wednesdays this season, most traders and money managers have been away since December 23rd and not returning until Monday, January 6th, 2025. Money managers are generally reluctant to take meaningful new positions and then leave the office for an extended holiday period. As such, I don’t expect to gain a clear sense of market direction until the end of the week of January 6th, 2025.
Self-fulfilling prophecy?
Now for the self-fulfilling prophecy: This year, the anticipated Santa Claus Rally has not materialized thus far. Instead, the S&P 500 and Dow Jones Industrial Average have posted their largest monthly losses since April, declining 2.1% and 5.2%, respectively. The absence of a Santa Claus Rally can sometimes signal potential market weakness. Historically, when this rally doesn’t occur, it has preceded a market downturn in the early months of the following year. That, my friends, is the possible self-fulfilling prophecy: a lack of buying momentum could keep traders on the sidelines, exacerbating market jitters.
The Positive Outlook
On the brighter side, the Atlanta Federal Reserve’s GDPNow estimate for fourth-quarter growth is hovering around 3%. This is an exceptionally strong figure that could set the stage for a robust earnings season. Profit margins for the S&P 500 are projected to be around 12%, another positive indicator that suggests earnings resilience. Earnings growth and profit margins in a lower interest rate environment sustain markets historically.
The Downside Risks
However, the markets remain nervous and appear to be looking for reasons to sell off. Key concerns include uncertainty over new policies from the incoming administration and how these might align with Federal Reserve strategies, historically high multiples, and an extended market. Additionally, I anticipate that an economic report in the first or second month of 2025—likely focused on the service sector—could be interpreted as inflationary by the stock market. This scenario has the potential to trigger a larger correction.
Conclusion
For long-term investors holding quality names, staying the course will likely prove rewarding in the long run. I’m considering taking chips off the table when the opportunity arises, particularly to reinvest in stocks I believe are a quarter or two away from the bottom of their business cycle.
Become a free member and check out stock picks for important stock updates! I have a new favorite pick coming soon for 2025!