Investors are hoping for a year-end boost in the stock market, known as a “Santa Claus rally,” even as stocks have lost momentum recently. The benchmark 10-year Treasury yields have reached their highest levels in over six months. In December, eight of the 11 S&P 500 sectors have been in negative territory.
The S&P 500 is also trading on forward earnings estimates that are well above the historical average. European shares edged up on Tuesday, though moves were subdued in a holiday-shortened week. The U.S. dollar has held near a two-year high, supported by high U.S. Treasury yields as investors speculate on fewer Federal Reserve rate cuts in 2025.
The second half of December is typically the second-strongest period of the year for U.S. equities. With markets closing early on Tuesday for Christmas Eve and shuttering again for New Year’s Day, the holiday period often brings muted trading activity. According to Paul Hickey, cofounder of Bespoke Investment Group, money often flows into the market as people invest their bonuses and make trades to minimize taxes.
Santa Claus rally hopes high
Less corporate news and relatively stable company valuations also contribute to this trend. December has been the second-best performing month for the S&P 500 since 1950, behind only November, according to a recent analysis from LPL Financial.
The S&P has gained in December 74% of the time since 1950, better than any other month. That number rises to 83% in presidential election years, according to Bank of America. However, when Santa brings coal to Wall Street, it can signal tough times ahead.
Market dips during the typical holiday rally period in 1999 and 2007 served as precursors to significant downturns. Despite being down about 1.5% this month, the S&P is up 25% in 2024 and is currently on track to post its fifth-best year since 2000. The index was up slightly as of midday Monday, nearing the $5,950 threshold.
Retail traders should note that lower liquidity around the holiday period can bring increased risk. Prices may swing more quickly and dramatically as investors try to expand or exit their positions.
