Indicators of Splits Leave Investors 'Frozen in Indecision.' The Tiebreaker Awaits.

Two widely followed, but overlapping, stock-market indicators have delivered mixed signals for investors seeking insights into full-year market performance. The deciding factor lies ahead.

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The Santa Claus rally, which refers to the S&P 500's tendency to climb during the last five trading days of a year and the first two trading days of the new year, failed to deliver in 2025. Over that period, the index fell by 0.53%. Meanwhile, the first-five-days indicator offered a more optimistic outcome, with the S&P 500 gaining 0.62% in the first five trading days of the year, which ended on Wednesday.

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Sam Stovall, chief investment strategist at CFRA, noted the mixed outcomes in a post-market commentary: “Now that the S&P 500 has recorded a price decline during the Santa Claus rally period while eking out a slight gain during the first five trading days of 2025, investors are once again frozen by indecision.”

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Dow Jones Market Data provides historical insights that might bring some optimism despite the disappointing Santa Claus rally. Historically, when the S&P 500 posts a positive return during the first five trading days, it has gone on to deliver a median full-year gain of 16%, rising 81.3% of the time since 1950. In contrast, when the index declines during the first five days, the median full-year gain drops significantly to just 2.6%, with gains occurring only 55.6% of the time.

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These figures suggest that a positive start to the year, as seen in 2025, could set the stage for a stronger performance over the next 12 months. However, this doesn’t necessarily settle the matter.

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Jeff Hirsch, editor of the Stock Trader’s Almanac, emphasized that the January barometer, which tracks the market’s performance over the entire month of January, holds more weight as an early-year indicator. According to Hirsch, when the S&P 500 posts a loss during the Santa Claus rally but gains for the full month of January, the outlook for the year is overwhelmingly positive.

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Since 1950, there have been seven instances when the Santa Claus rally failed but the January barometer turned positive. In six of those cases, the S&P 500 delivered an average annual gain of 18.2%. The lone exception was in 1994, when the index dipped by 1.5%.

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The divergence between these two indicators underscores the need for a tiebreaker, which the January barometer could provide. While the Santa Claus rally is often seen as a lighthearted market phenomenon, its failure this year does raise questions about investor sentiment. Meanwhile, the positive outcome from the first five trading days offers hope that the broader trend could lean toward gains.

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If history is any guide, the market’s performance through the end of January could solidify expectations for the year ahead. A positive January has often correlated with strong full-year returns, even in cases where the early trading days or the Santa Claus rally faltered.

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Investors remain cautious amid these conflicting signals, balancing optimism from the first five days against the disappointment of a lackluster Santa Claus rally. Broader economic factors, earnings reports, and Federal Reserve policy decisions will likely influence market momentum in the weeks ahead.

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For now, the January barometer takes center stage. With nearly three weeks remaining in the month, investors will watch closely to see whether the S&P 500 can build on its modest early gains, providing clarity on the potential trajectory for 2025.

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