Market Analysis

Is the Santa Claus Rally Coming? Analysts Eye Potential Market Risks

Amos Simanungkalit · 24 Dec 202438.4K Views

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The stock market history often includes a "Santa Claus" rally in late December, typically delivering positive returns for investors. In 2024, the AI boom helped propel stocks to one of their best years in recent memory, but last week, the Federal Reserve’s firm stance on interest rates dampened market enthusiasm, causing indexes to drop. This has led investors to wonder if the usual Santa rally can offset the recent sell-off and wrap up a strong year.

The second half of December is generally the second-best period for U.S. equities, according to Bank of America. With markets closing early on Christmas Eve and reopening just before New Year’s, holiday trading tends to be quieter, yet investors often make trades using bonuses or to adjust for taxes, which can fuel market activity.

Less corporate news and relatively stable company valuations during this time also contribute to market strength, explaining why December has historically been the second-best month for the S&P 500 since 1950, according to LPL Financial. The S&P has risen in December 74% of the time since 1950, with even stronger performance in presidential election years (83%), per Bank of America.

However, if the holiday rally fails to materialize, it can signal potential difficulties ahead. Similar dips during the holiday season in 1999 and 2007 preceded the dot-com crash and the 2008 financial crisis. Despite a slight pullback in December, the S&P is up 25% in 2024 and is on track for its fifth-best year since 2000.

Bank of America noted that the Federal Reserve’s final meeting of 2024 likely represented the “last hurdle” for a potential Santa rally, which the market failed to overcome. Despite this, they also highlighted that hedging options for a year-end rally are currently cheaper than they’ve been since the pandemic.

Retail traders should be cautious, as lower trading volumes during the holiday period can increase volatility, leading to sharper price swings as investors adjust their positions.