With the Dow Down in December, Wall Street's Santa Claus Rally Window Will Open

As the holiday season approaches, the stock market has been facing challenges despite a rally on Friday. The early days of December saw a sudden shift in momentum, which Mark Hackett, Nationwide’s chief market strategist, described as an "almost light-switch moment." This shift led to a breakdown in market breadth, undermining November's robust gains. Hackett expressed skepticism about the likelihood of a traditional "Santa Claus rally," suggesting that the market may have already experienced its end-of-year surge last month.

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The Dow Jones Industrial Average has given up most of its gains for the quarter, losing 4.6% in December alone through Friday. Similarly, the S&P 500 has posted consecutive weekly losses, while the Nasdaq Composite ended a streak of four straight weekly gains. These declines came after the Federal Reserve indicated it might ease interest rates less aggressively in 2025 than previously anticipated. This shift in policy outlook has dampened the post-election market rally, raising concerns about the S&P 500's narrow leadership and uncertainties surrounding the incoming administration's policies.

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Historically, the holiday trading period tends to bring positive returns, but 2023 was an exception, with the S&P 500 falling 0.9% during the so-called "Santa Claus rally" period. This year’s holiday stretch begins on Christmas Eve and extends to January 3, covering the last five trading days of December and the first two of January. Since 1950, the S&P 500 has risen an average of 1.29% during this period, with gains recorded 77% of the time. However, the market’s recent struggles may temper investor expectations for a strong year-end performance.

Economic data offers a mixed picture. Consumer spending and income growth in November have been robust, while inflation, as measured by the personal consumption expenditures price index, showed a modest increase, slightly below Wall Street’s forecasts. Friday’s softer inflation data provided some relief to investors concerned about persistent price pressures as the market heads into 2025. Even so, all three major stock indexes ended the week in the red, unable to fully recover from midweek losses.

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On Friday, the Dow gained 1.2%, marking its largest single-day increase since early November, while the S&P 500 and Nasdaq Composite rose 1.1% and 1%, respectively. Despite this bounce, weekly losses were significant: the Dow fell 2.3%, the S&P 500 dropped 2%, and the Nasdaq retreated 1.8%. Tech-heavy stocks, which have driven much of the market’s rally this year, delivered mixed results. The Roundhill Magnificent Seven ETF, which tracks major tech players like Apple, Microsoft, and Nvidia, posted a weekly loss of over 1%, breaking a four-week winning streak.

The rally that followed the U.S. presidential election has faded, as concerns have shifted from deregulation and tax cuts to the Federal Reserve's policy trajectory, inflation persistence, and the risk of a partial government shutdown. While the House and Senate passed a bipartisan funding bill on Saturday to temporarily avert a shutdown, unresolved issues like the debt ceiling have been pushed into 2025.

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Additionally, investors are awaiting clarity on trade and immigration policies under the new administration. Aggressive tariff strategies and mass deportation plans could heighten inflation risks and dampen economic growth, adding to market uncertainty.

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As the year winds down, both the Dow and S&P 500 remain in negative territory for December, despite overall strong performance in 2024. Hackett noted that the average stock in the S&P 500 has struggled throughout the month, contributing to a 1.7% decline for the index in December and trimming its fourth-quarter gain to 2.9%. Meanwhile, the Dow has eked out a modest 1.2% quarterly gain, while the Nasdaq has performed better, rising 1.8% in December and achieving a 7.6% fourth-quarter increase.

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The broader market, however, has already seen remarkable gains this year. The Nasdaq has soared 30.4% year-to-date, the S&P 500 has climbed 24.3%, and the Dow has risen 13.7%. Despite these impressive figures, the S&P 500 remains 2.6% below its all-time high set on December 6. According to Anthony Saglimbene, chief market strategist at Ameriprise Financial, much of the optimism for 2024 is already reflected in stock prices. “We’ve had a really strong year in the market,” he said, tempering expectations for a significant rally in the remaining days of December.

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Looking ahead, investors will need to navigate uncertainties surrounding fiscal policy, inflation, and the Federal Reserve's next moves. With the market showing signs of fatigue, the focus may shift toward the opportunities and risks that 2025 could bring.

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