Will This Year's Stock Market See a Santa Claus Rally?
2min read As the year-end approaches, investors are keeping a close eye on whether the much - anticipated Santa Claus rally will materialize. This annual phenomenon has a significant influence on market sentiment and portfolio performance.
Historically, the second half of December is usually a strong period for U.S. equities. Bank of America notes that it's the second - best time of the year for stocks. The holiday period, with markets closing early on Christmas Eve and for New Year's Day, often sees muted trading.
However, money tends to flow in as people invest bonuses and make tax - minimizing trades. Also, less corporate news contributes to relatively stable company valuations. Since 1950, December has been the second - best performing month for the S&P 500, behind only November. The S&P has gained in December 74% of the time since then, and this percentage rises to 83% in presidential election years.
This year, the start of the Santa Claus rally seems to be off to a rocky start. A team at Ned Davis Research pointed out that stocks have been struggling ahead of the rally period, which begins on Tuesday. Since the Dec. 17 close, the S&P 500 has fallen nearly 2%, largely due to Federal Reserve Chair Jerome Powell's news conference on Sept. 18. After the central bank announced an interest - rate cut, Powell's hints about a slower pace of borrowing - cost reductions in 2025 led to stock losses.
But there's still hope. Historically, when stocks struggle in the days before Christmas, they often compensate investors with strong gains in the five trading days after the holiday break. In the 17 cases where the first five days before Christmas were negative, the average return in the five days after was 2.0%, according to NDR analyst London Stockton.
Moreover, several factors suggest stocks could reverse their December weakness. The U.S. market has fallen into short - term oversold territory, and a sentiment tracker shows that investors' optimism has deteriorated since December started. This could mean there's cash on the sidelines ready to be invested.
It's important to note that the absence of a holiday rally can sometimes signal trouble. Market dips during the typical holiday rally in 1999 and 2007 preceded the dot - com bubble and 2008 financial crisis respectively. However, last year, a minor sell - off around New Year's Day wasn't a harbinger of future problems.
