The history of the stock market shows that, most years, there is a “Santa Claus” rally that leaves investors on the right side of the “naughty or nice” list. In 2024, the AI boom helped power stocks to one of their best years in the new millennium but, last week, the Federal Reserve put a damper on the party by drawing a hard line on interest rates and causing indexes to tumble. This has left many investors wondering if some Santa magic can erase the sell-off and put a bow on a great year.
The second half of December is typically the second-strongest period of the year for U.S. equities, according to a recent note from Bank of America. With markets closing on 1 p.m. on Tuesday for Christmas Eve before reopening on Thursday—and shuttering again for New Year’s Day—the holiday period often brings muted trading activity. Still, money often flows into the market, Paul Hickey, cofounder of Bespoke Investment Group, recently told Investopedia, as people invest their bonuses and make trades to minimize taxes.
Less corporate news and, therefore, relatively stable valuations for companies also helps, he said. This helps explain why December has been the second-best performing month (behind only November) for the S&P 500 since 1950, according to a recent analysis from broker-dealer LPL Financial.
The consistency of these holiday rallies is also striking. The S&P has gained in December 74% of the time since 1950, per LPL, better than any other month. That number rises to 83% in presidential election years, according to Bank of America. Those gains are often back-loaded, hence the reference to Kris Kringle.
“Stocks were flat or even fell in value on average during the first half of December,” LPL’s George Smith wrote, “before, on average, rallying in the second half of the month (upward momentum builds around the 11th trading day of the month).”
No holiday rally may spell trouble
When Santa brings coal to the Street, however, it can signal tough times ahead. Market dips during the typical holiday rally period in 1999 and 2007 served as precursors to the dot-com bubble and 2008 financial crisis, respectively.
Last year, though, a minor sell-off around New Year’s Day was not a harbinger of things to come. Despite being down about 1.5% this month, the S&P is up 25% in 2024 and is currently on track to post its fifth-best year since 2000. The index was up slightly as of midday Monday, nearing the $5,950 threshold.
Last Sunday, Bank of America said the Federal Open Market Committee’s final meeting of 2024 was likely the “last hurdle” for a Santa rally—a hurdle the market failed to clear. Still, the note also mentioned that the cost to hedge for a year-end rally using S&P 500 options has not been cheaper since the pandemic.
“Hence, we like year-end upside hedges in SPY,” BofA’s Gonzalo Asis, Stephen Juneau, and Ohsung Kwon wrote, “either (i) to replace and lock in some equity gains, or (ii) to add risk-limited large-cap Tech exposure for those who may have started rotating away from it.”
Retail traders should note, however, that lower trading volumes around the holiday period can bring increased risk. Prices may swing more quickly and dramatically as investors try to expand or exit their positions.
