Does A Calm Market On The First Post-Christmas Trading Day Mean We Can Expect A 'Santa Claus Rally'?

On the first trading day after Christmas, the U.S. stock and bond markets operated steadily on Thursday, with most major European markets still closed, resulting in relatively quiet trading. In the end, the three major U.S. stock indices were roughly flat for the day, with the Dow, S&P, and Nasdaq all closing with gains or losses of less than 0.1%. U.S. Treasury yields were mixed for the day, with the post-holiday first-day's bulls and bears not yet determining a clear winner.

Looking at the trend, although the day's gains and losses were extremely limited, the Dow was fortunate to be the only one of the three major U.S. stock indices to rise on Thursday. The Dow Jones Index has rebounded for five consecutive trading days, while the S&P and Nasdaq, which performed excellently earlier this month, have begun to slow down: the Nasdaq ended its four-day winning streak on Thursday, and the S&P 500's three-day rally also came to an end.

There were not many market catalysts that day, and investors initially reacted to the rise in U.S. Treasury yields during the session, including the benchmark 10-year U.S. Treasury yield reaching its highest point since early May at 4.64% in the early morning.

However, as the seven-year U.S. Treasury auction results were strong in the afternoon, they helped U.S. Treasury yields to fall from their highs. The overnight seven-year U.S. Treasury auction's award rate was 4.532%, about 2 basis points lower than the secondary market yield at the end of the auction. The bid-to-cover ratio was 2.76 times, the highest level since March 2020.

Currently, a major trend in the U.S. Treasury market remains the further steepening of the yield curve. The spread between the 3-month and 10-year yields has reached its widest level since October 2022.

According to the term structure of federal funds rate futures, traders currently believe that the Federal Reserve is highly unlikely to further ease policy at the January meeting after cutting rates by 25 basis points last week. The U.S. federal funds rate target range has now been reduced to 4.25%-4.50%.

Data from LSEG shows that traders even believe the Federal Reserve will not cut rates again before May next year, and the possibility of cutting rates twice by the end of next year is less than 50%.

Federal Reserve officials have previously stated that strong employment, steady economic growth, and slow progress in bringing inflation down to the 2% target could all be potential reasons for slowing the pace of rate cuts. Therefore, the market is continuously adjusting expectations.

Higher yields are traditionally seen as unfavorable for growth stocks because they increase the borrowing costs for the capital they need for expansion. With the increasing dominance of the so-called Seven Giants of technology stocks in the market, especially in the absence of other market catalysts, some industry insiders worry that this could put downward pressure on the main stock indices.

However, given that long-term bond yields did not rise significantly on the first day after Christmas, and the U.S. stock market is currently in the traditional seasonal favorable period of the Santa Claus Rally, investors may not need to worry too much for the time being. Yesterday was the second day of the seven-day Santa Claus Rally at the end of the year and the beginning of the next year - According to Yale Hirsch, the author of The Stock Trader's Almanac, the U.S. stock market tends to perform strongly during this period.

Over the past 70 years, the S&P 500 has seen an average gain of about 1.3% during these seven trading days, with a probability of rising during this period as high as 78%. The strong market performance during this period may be partly attributed to low liquidity, tax-loss harvesting, and year-end bonus investments.