This Year's Stock Market 'Santa Claus Rally' Might Be Late

The anticipated Santa Claus rally might arrive later than usual this year, but many investors remain optimistic that it will eventually make an appearance. According to strategists at Ned Davis Research (NDR), the lead-up to the “Santa Claus rally” period—starting this Tuesday—has been marked by underperformance in stocks, raising concerns among market participants about whether the rally could skip a second consecutive year.

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Historically, even when stocks falter before Christmas, they have often bounced back strongly in the subsequent trading days. Data from NDR reveals that during the 17 instances when the S&P 500 performed negatively in the five days leading up to Christmas, the index delivered an average return of 2% in the five days following the holiday.

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London Stockton, an analyst at NDR, underscored this trend in a report, noting that while the market is currently down by 2% with just two days to go before Christmas, historical patterns suggest optimism for a post-holiday rebound.

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Recent market data supports the observation of a challenging December. From December 17 through midday Monday, the S&P 500 declined nearly 2%, as per FactSet. Much of the downturn came after Federal Reserve Chair Jerome Powell’s press conference on December 18, during which he hinted at a more measured pace of interest-rate reductions in 2025. This tempered the initial positive reaction to the central bank’s announcement of a rate cut, leaving stocks on shaky ground.

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The Santa Claus rally, which spans the last five trading days of December and the first two trading days of the new year, has delivered reliable gains in the past. Since 1950, the S&P 500 has averaged a 1.3% return during this seven-day window, rising 77% of the time, according to Dow Jones Market Data. This year, the rally is expected to conclude on January 3. NDR’s cycle composite, which charts typical seasonal trends, shows a pattern of strong year-end performance for equities.

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Beyond seasonal trends, other factors might help stocks recover before year-end. NDR noted that the U.S. market is currently in short-term oversold territory based on several technical indicators. Additionally, the firm’s sentiment tracker has detected a decline in investor optimism amid December’s weak market performance. This could indicate that cash reserves held by cautious investors are ready to flow back into the market, potentially driving gains.

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Even if the Santa Claus rally fails to materialize, investors have enjoyed a strong year overall. As of midday Monday, the S&P 500 was up more than 24% year-to-date, supported by solid performances from major stocks and sectors.

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However, the start of the holiday-shortened trading week brought mixed results. Both the S&P 500 and the Dow Jones Industrial Average traded lower, giving back some of the momentum gained during Friday’s rebound.

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Meanwhile, the Nasdaq Composite bucked the trend, continuing to rise thanks to strength in Big Tech names like Nvidia, Broadcom, and Tesla, which posted gains of 1.14%, 2.45%, and 4.86%, respectively.

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In summary, while the Santa Claus rally may be delayed, historical data and market conditions suggest there is still a chance for a strong finish to the year. Factors such as oversold market conditions and cautious investor sentiment might provide the needed fuel for a rebound, even as broader uncertainties remain. Whether the rally materializes or not, 2024 has already been a banner year for the markets, leaving investors with plenty to celebrate.

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