Will the Market Get a ‘Santa Claus Rally’?
Analysts and investment experts are predicting that the stock market will end the year on a high note – with a few assumptions, such as higher interest rates and the effects of the government shutdown. If stocks gain during the final days of the year, this will be the first so-called “Santa Claus rally” in three years.
This term, coined by Yale Hirsch in investing in 1972, refers to the historical tendency of stocks to rise during the Christmas season. The calendar dates for the Santa Claus convention vary depending on which day of the week Christmas and New Year’s fall, but are generally considered to be the last five business days of December and the first two business days of January.
According to Dow Jones Market Data, the three major indexes – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite – entered a record of gains of 1.3% to 1.65% in these seven days. Over the past few decades, the broad-based S&P 500 index has closed higher about 75% of the time.
Although there is no Magic 8 Ball that can predict the market outcome for sure, here is what the experts have to say about the chances of the 2025 Santa Claus meeting.
Yes, we will have a meeting with Santa Claus
“I think it’s possible,” said Jed Ellerbroek, portfolio manager at Argent Capital Management in St. Louis. “There’s more positive than negative market conditions” today, he says, noting double-digit corporate earnings growth, IPO acquisitions and M&A activity and AI-driven spending. “I think growth is a little bit more expansive,” he adds, which benefits a broader swath of corporate America.
Investment experts say that there are several technical events at this time that are influencing year-end rallies and making it possible that we will have them in 2025. First, trading volume is light because many traders are on vacation during the winter holidays. This increases activity, and retail investors who buy and sell tend to be more optimistic than their institutional counterparts. Portfolio rebalancing and selling to absorb tax losses also play a role in year-end market activity.
Some experts suggest that holiday cheer helps drive year-end gains. “A lot of people, if they’re looking at the Santa Claus rally, it’s a confirmation of the hope that’s there,” Sam Stovall, chief investment strategist at CFRA Research, told Money earlier.
This year, that optimism translates into a higher tolerance for risk, according to Adam Turnquist, chief strategist for LPL Financial in Charlotte, North Carolina. “The appetite seems to be back… and that’s the rotation you really want to see,” he said.
“We have good momentum in the market,” he noted, looking ahead to the final five days of the year, which begin on Wednesday. “If you look at the progress of December, it’s a very backward-looking month in terms of performance. Most of the gains come during the holiday season.”
Also, historical odds favor an optimistic view: Both 2023 and 2024 failed to deliver Santa Claus rallies for the S&P 500, and Turnquist says that in 75 years of market data, there has never been a period of three consecutive years without one.
No, Wall Street will get Scrooged
However, not everyone is so happy. “Investors are wandering into an area where traditional year-end patterns may be challenged,” warned Bank of America’s global research team.
“December tends to be synonymous with rising prices,” BofA wrote in a recent research note. “But this year’s background is unusual.” A combination of AI-driven volatility, uncertainty about the future direction of the Federal Reserve’s policy and the ongoing effects of the government shutdown on the publication of economic data are contributing to the volatility. dynamic. “Thus, the December rally may face headwinds,” BofA warned.
One factor in the current market that could weigh on the Santa Claus rally is higher bond yields, according to Turnquist. Even though the Fed is cutting rates three times through 2025, including a cut in December, the 10-year Treasury yield — used by Wall Street as a measure of corporate borrowing costs — hasn’t fallen that much.
“They are not far from 4.2%. If we start to exceed that level, then we present a big risk,” said Turnquist. “That would pour cold water on this equity circle” by clipping the wings of fast-growing startups and smaller companies that need to borrow heavily to expand.
It doesn’t matter anyway
For people saving for retirement, a Santa Claus meeting shouldn’t be an event, says Chad Holmes, founder of Formula Wealth in Fairhope, Alabama..
“There’s a difference between gambling and investing,” he said, warning that changing any of your investments to try for short-term gains is risky. Even Wall Street experts aren’t very good when it comes to timing the market, and short-term volatility can wipe out gains as quickly as they add up.
“When you try to put in a short-term, flexible position, you might win. You might not,” Holmes said. If you need those investments in the short term, trying to time the market can result in you locking in losses rather than waiting for valuations to recover.
The end of the year gives you a good opportunity, however, to review your asset allocation and make sure it’s still in line with your risk tolerance and long-term goals. If technology-driven stock gains have thrown your share off the balance sheet, now is a smart time to recalibrate, advises Holmes.
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