The December Stock Market Performance is Balanced as the 'Santa Claus Rally' Begins

The “Santa Claus rally” period began during Tuesday’s shortened holiday trading session, with the S&P 500 surging 1.1%. This marked the index’s third consecutive gain, erasing earlier losses in December caused by a midweek downturn.

‍

Despite a stellar year for the large-cap benchmark, December remains poised to defy its historical reputation as one of the strongest months for stock performance.

‍

Jeff deGraaf, chairman and head of technical research at Renaissance Macro Research, remarked in a note prior to Tuesday’s opening that the recent rally showed limited momentum. “The S&P has delivered respectable numbers over the last two sessions as it attempts to resolve the oversold condition, but the rally has lacked momentum,” deGraaf observed.

‍

Historically, December offers a 74% probability of positive returns, he added. However, 2024 appears to be an outlier, with just a 26% chance of finishing on a high note unless there’s a dramatic boost in the final days.

‍

The Santa Claus rally, a concept first identified by Stock Trader’s Almanac founder Yale Hirsch in 1972, refers to a seasonal tendency for the S&P 500 to rise over the final five trading days of the year and the first two of the following year. This year, the period began at Tuesday’s opening bell and will run until Jan. 3.

‍

Since 1969, the S&P 500 has averaged a 1.3% gain over this seven-day period, according to the Almanac and Dow Jones Market Data. This far exceeds the index’s average gain of 0.24% over any seven-day stretch.

‍

What drives this phenomenon? MarketWatch columnist Mark Hulbert suggests it may stem from investors’ general disinterest in the markets during the holiday season. This lack of active trading or speculation allows the pattern to persist, even as other seasonal trends diminish once widely recognized by investors.

‍

On Tuesday, the rally began on solid footing. The S&P 500 reversed its December decline to post a 0.2% month-to-date gain. Meanwhile, the Dow Jones Industrial Average rose nearly 400 points, or 0.9%, despite a 4% drop in December. The Nasdaq Composite, buoyed by a resurgence in tech stocks, climbed 1.3% for the day and extended its December gain to 4.2%.

‍

With U.S. markets closing early Tuesday and remaining shut on Wednesday for Christmas, investors are looking ahead to the rally’s potential continuation. Trading will resume Thursday morning.

‍

The Santa Claus rally has long been linked to investor sentiment heading into the new year. Hirsch’s adage, “If Santa Claus should fail to call, bears may come to Broad and Wall,” underscores the rally’s perceived significance.

‍

Historically, the absence of a Santa Claus rally has often preceded bear markets or provided opportunities to buy stocks at lower prices. Jeff Hirsch, editor of the Stock Trader’s Almanac, points out that failed rallies were followed by flat years in 1994, 2005, and 2015. They also preceded notable bear markets in 2000 and 2008, as well as a mild bear market ending in February 2016.

‍

Still, no market adage is infallible. Last Christmas, the Santa Claus rally failed to materialize, yet 2024 has been an outstanding year for the S&P 500. The index is on track for a 26% annual gain, with its steepest correction—a modest 8.5% decline—occurring between mid-July and early August.

‍

As 2024 nears its conclusion, the Santa Claus rally remains an opportunity for stocks to reclaim December’s sluggish performance and further enhance what has already been an impressive year. Whether the rally lives up to its historical precedent or falters remains to be seen, but its outcome could set the tone for early 2025.

‍