'Santa Claus' Rally in Doubt as S&P Stumbles and Fed Signals Trouble for Year-End Gains

Hopes for a "Santa Claus" rally are fading as the S&P 500 battles December losses and rising Treasury yields. With 2024 up 24%, investors question if the year will close on a high note or end with a whimper.

Santa Claus Rally Hopes Amid December Market Challenges

Investors are hoping for some holiday happiness at the end of 2024 after a disappointing December in what has otherwise been a fantastic year for U.S. equities, but they are also warning of possible challenges.

Despite a big setback this week, the benchmark S&P 500 is still up over 24% for 2024, and Wall Street has a history of robust annual closes.

The Stock Trader's Almanac reports that, on average, the S&P 500 has gained 1.3% during the "Santa Claus Rally," which occurs every year around the conclusion of the year's trading and the beginning of the next two. This trend dates back to 1969, Investing.com shares.

Federal Reserve Signals Surprise Investors

Santa Claus may let people down this year, though.

After the Federal Reserve surprised investors by signaling fewer-than-expected interest rate reduction in 2025, the S&P 500 had its largest one-day decline since August on Wednesday.

Additionally, the market's underlying health appears to be worse: In December, eight out of eleven S&P 500 sectors have fallen, and the equal-weight S&P 500—a measure of the average stock in the index—has down by seven percent.

Rising Treasury Yields Add to Investor Worries

As the year comes to a close, rising Treasury yields are another factor that asset manager Miller Tabak's chief market strategist, Matt Maley, sees as concerning for equities. Rates on benchmark 10-year bonds reached 4.55% on Thursday, the day after the Fed meeting, the highest point in over six months.

With the S&P 500 currently selling at 21.6 times forward earnings estimates—much higher than its 15.8 historical average—equity valuations will be further pressured by that increase in rates, according to LSEG Datastream.

Market Pullback Sparks Hopes for Rebound

"We're ending the year with people finally facing the reality that the stock market is extremely expensive and the Fed is not going to be as accommodative as they had been thinking," according to Maley.

The market's "setting up the market for a rebound," according to Horizon Investment Services CEO Chuck Carlson, who added that last week's downturn may have been beneficial since it subdued some of the uneasiness around stocks. "If there is further follow through on the downside, that could be a little bit more dangerous to the bullish trend."

Santa Claus Rally Seen as Market Indicator

According to the Almanac, the Santa Claus period, along with the first five trading days of January and the performance of the year overall, serves as an indicator for the year ahead. When all three of these factors are positive, the year has ended higher more than 90% of the time in the past 50 years.

According to Carlson, the S&P 500 had a spectacular 5.7% return in November, propelled by Donald Trump's triumph in the presidential election on November 5. Therefore, it is possible that this year's seasonal strength arrived early.

MegaCap Stocks Lead Narrow Market Gains

"It's been a strong year for the market, and you can make an argument that we kind of got the year-end rally in November instead of December," Carlson pointed out.

Additionally, if there are indications that the market rally is becoming narrower, it could dampen any holiday spirit.

December has been a good month for many megacap stocks, including Alphabet and Tesla, which are up over 13% and 22%, respectively. After Broadcom predicted booming demand for its custom artificial intelligence processors this month, sending its market worth above $1 trillion, the company's shares rose 36% for December.

Worrisome Signs as Market Declines Continue

On the other hand, progress in this area is becoming severely lacking. As of Wednesday, the biggest losing run in LSEG data back to 2012 was 13 sessions, during which the number of S&P 500 components that sank surpassed those that climbed.

Adam Turnquist, senior technical strategist for LPL Financial, noted that the percentage of S&P 500 companies trading above their 200-day moving averages fell to 56% as of Wednesday, a new low for the year. This is another concerning indicator.

"We recommend waiting for support to be established and for momentum to improve before stepping up to buy the dip," Turnquist said in a note following Wednesday’s selloff.