A Buying Opportunity in the New Year Has Opened Up, Says Tom Lee

Wall Street has seen an unusual absence of the traditional Santa Claus rally this year, as stocks failed to deliver the typical end-of-year gains.

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The S&P 500 has dropped 1.2% since Tuesday, bucking the historical trend of the Santa Claus rally. Traditionally, this period—encompassing the last five trading days of December and the first two sessions of January—has seen stocks rise. According to the Stock Trader’s Almanac, the index has averaged a 1.3% gain during this window since 1969.

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This year, December has proven challenging overall, with the S&P 500 shedding 1% so far. Several factors have weighed on the market, including weak breadth and rising Treasury yields. Jonathan Krinsky of BTIG highlighted that only 58% of S&P 500 companies are trading above their 200-day moving averages, marking the lowest level this year. Additionally, the 10-year Treasury yield recently climbed above 4.6%, driven by the Federal Reserve's indication of fewer rate cuts in 2025 than previously anticipated.

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The downward trend seems poised to continue. Stock futures pointed to declines on Monday, with both S&P 500 and Nasdaq-100 futures falling over 1%, while the Dow Jones Industrial Average dropped by more than 400 points. However, these moves should be interpreted cautiously. The holiday season often sees low trading volumes, which can exaggerate market swings.

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Despite December’s disappointing performance, Tom Lee, head of research at Fundstrat, sees reasons for optimism heading into 2025.

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“While December has been disappointing, we do not think this is a sudden change in market character,” Lee wrote in a Sunday note. “Buying dips has been profitable throughout 2024, and the market has shown resilience against prolonged periods of weakness.”

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Lee pointed to several fundamental tailwinds that remain in place as the new year approaches. These include the potential for deregulation under the incoming Trump administration, a reduction in business borrowing costs, and the boost in investor confidence often associated with Republican control of the White House and Senate.

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Lee advised investors to focus on small-cap stocks, cyclical sectors like financials, and Bitcoin to capitalize on these tailwinds.

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The iShares Russell 2000 ETF (IWM), which tracks the small-cap benchmark, has gained 10% year-to-date but has slipped 8% in December. Meanwhile, the financials sector within the S&P 500 is down 5% for the month but has rallied nearly 30% in 2024, showcasing its potential for further growth.

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Bitcoin has also had a remarkable year, hitting record highs above $100,000 before retreating to around $93,000. Its performance underscores its role as a high-risk, high-reward asset class amid evolving market dynamics.

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The absence of a Santa Claus rally reflects broader uncertainties in the market, including concerns over monetary policy, inflation, and uneven performance across sectors. However, Lee’s perspective suggests that the challenges seen in December may not represent a fundamental shift in market dynamics but rather a temporary setback.

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As 2025 begins, investors will likely focus on factors such as corporate earnings, Federal Reserve policy, and the global economic outlook to gauge the trajectory of equities. The resilience demonstrated by small-cap stocks, financials, and alternative assets like Bitcoin may provide opportunities for growth in the coming year.

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While the holiday season has brought challenges for the stock market, signs of resilience and optimism remain. The historical trend of buying on dips could continue to prove profitable, supported by favorable policy expectations and a steady economic backdrop. As investors navigate this transitional period, a strategic focus on cyclical sectors and alternative assets may help capture opportunities in an evolving market landscape.

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