Will the Dow Join the Santa Claus Rally?

U.S. Stocks Close the Week with Losses Despite Friday Rally

U.S. stocks ended the week in negative territory, weighed down by concerns over Federal Reserve policy, inflation, and narrowing market breadth. While Friday’s rally offered a brief respite, it wasn’t enough to erase losses for the week.

December Slump Undermines Holiday Optimism

The U.S. stock market stumbled in December after a robust November rally. Mark Hackett, chief market strategist at Nationwide, described an “almost light-switch moment” earlier this month that led to a “breakdown in breadth.”

“I don’t feel comfortable that the traditional Santa Claus rally is going to come,” Hackett said, noting that the November surge might have borrowed gains typically seen in late December.

The Dow Jones Industrial Average (DJIA) dropped 4.6% this month, erasing most of its quarterly gains. The S&P 500 (SPX) recorded consecutive weekly losses, while the Nasdaq Composite (COMP) ended its streak of four straight weekly gains, per Dow Jones Market Data.

Fed Signals and Inflation Concerns

Investor sentiment soured after the Federal Reserve suggested it may scale back interest rate cuts in 2025. Coupled with persistent inflation concerns and a concentration of gains in a few large-cap stocks, this dampened optimism surrounding the broader market.

Holiday Trading Period Holds Uncertainty

Historically, the “Santa Claus rally” period—spanning the final five trading days of December and the first two of January—has delivered average gains of 1.29% for the S&P 500 since 1950. However, last year bucked this trend with a 0.9% decline, and this year’s market conditions suggest a repeat could be possible.

Softer Inflation Data Sparks Friday Rebound

November inflation data, which came in slightly below expectations, brought relief to investors on Friday. The Dow rose 1.2%, marking its largest single-day gain since November, while the S&P 500 and Nasdaq climbed 1.1% and 1%, respectively. Despite this rally, all three major indexes finished the week lower, with the Dow down 2.3%, the S&P 500 off 2%, and the Nasdaq slipping 1.8%.

Tech Sector Under Pressure

Big Tech stocks, which have driven much of 2024’s rally, delivered mixed results this week. The Roundhill Magnificent Seven ETF (MAGS), which tracks key tech giants like Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta, lost more than 1% for the week, ending its streak of four weekly gains.

Policy and Economic Risks Loom

Market uncertainties extend beyond inflation, with concerns over potential changes to trade and immigration policies in 2025. Analysts worry that aggressive measures, such as new tariffs or mass deportations, could fuel inflation and slow economic growth.

A Strong Year Faces a Quiet Finish

Even with December’s struggles, 2024 has been a strong year for equities. The Nasdaq is up 30.4% year-to-date, the S&P 500 has gained 24.3%, and the Dow has risen 13.7%. However, the S&P 500 remains 2.6% below its December 6 record high.

“There’s a lot of optimism already priced into stocks,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “We’ve had a really strong year, but I don’t think we’ll see a significant rally from now until year-end.”