While 2024 has been a banner year for the S&P 500, December has been an underperformer, defying its historical reputation as one of the strongest months for stocks. S&P 500 Erases December Losses in Pre-Holiday Surge The S&P 500 rebounded sharply on Tuesday, erasing its December losses with a 1.1% gain in a shortened pre-holiday trading session. This marked the index’s third consecutive day of advances, reversing last week’s mid-month downturn and setting a positive tone for the start of the seasonal “Santa Claus rally” period. Jeff deGraaf, chairman and head of technical research at Renaissance Macro Research, noted earlier Tuesday that December historically has a 74% chance of delivering positive returns. However, he cautioned that this year’s performance is shaping up to fall within the 26% that bucks the trend unless momentum builds. The Santa Claus rally, a term coined by Yale Hirsch of the Stock Trader’s Almanac in 1972, refers to a historical pattern where the S&P 500 tends to rise during the final five trading days of December and the first two trading days of the new year. According to historical data, the index has averaged a 1.3% gain during this period, significantly outpacing the typical seven-day average gain of 0.24%. MarketWatch columnist Mark Hulbert has suggested that the rally persists in part because many investors disengage from active trading during the holidays, allowing the seasonal trend to play out relatively undisturbed. Tuesday’s rally provided a promising start to this year’s Santa Claus period. The S&P 500 turned its December decline into a 0.2% month-to-date gain. The Dow Jones Industrial Average rose 0.9%, trimming its December loss to 4%, while the Nasdaq Composite jumped 1.3%, extending its monthly gain to 4.2% on the strength of tech stocks. With markets closing early Tuesday and shutting down entirely on Wednesday for Christmas, investors are keeping an eye on the potential implications of the Santa rally—or its absence. As Jeff Hirsch, editor of the Stock Trader’s Almanac, has pointed out, a lack of a Santa rally has often been a harbinger of flat or bearish markets in the year ahead, as seen in 2000, 2008, and 2015. Still, 2024 has defied many traditional patterns. Despite the challenges of December, the S&P 500 is on track to post a stellar 26% annual gain, with its steepest pullback of the year—a modest 8.5%—occurring between mid-July and early August. As the year-end approaches, traders are hopeful that the Santa rally will bring its characteristic boost, helping the market finish an already strong year on an even higher note.

Treasury Yields and Dollar Levels Present Challenges for Stock Market Recovery Stocks started the holiday-shortened week on a positive note Monday, but the continued rise in Treasury yields and the U.S. dollar could act as hurdles to sustained equity gains, a prominent market analyst warned. Both the bond market and the dollar extended their upward trends, reaching levels that could pressure stock-market performance. This follows last Wednesday’s surge, when the Federal Reserve indicated it would implement fewer interest-rate cuts in 2025 than previously expected. The 10-year Treasury yield climbed to 4.594%, marking its highest close since late May, based on Dow Jones Market Data. Meanwhile, the ICE U.S. Dollar Index (DXY), which measures the dollar against six major currencies, rose 0.4% to 108.09, nearing Friday’s high of 108.54—its strongest level since November 2022. After a brief pullback last Friday driven by a positive inflation report, both yields and the dollar resumed their climb Monday. Rising yields, which move inversely to bond prices, and a stronger dollar often create headwinds for equities by pressuring corporate valuations and weighing on export-driven profits. Tom Essaye, founder of Sevens Report Research, described the current levels of the 10-year yield and the dollar as “mild” headwinds but cautioned that their impact could grow if they continue to rise. Despite these pressures, stocks managed to post gains Monday, albeit in thin preholiday trading. The Dow Jones Industrial Average added nearly 100 points, or 0.2%, while the S&P 500 advanced 0.8%, led by strength in semiconductor stocks. The Nasdaq Composite outperformed with a 1% increase. Even with Monday’s gains, major indexes remain down for the month following losses last week. However, the S&P 500 continues to show impressive year-to-date performance, with gains exceeding 25%. In the bond market, last week saw the yield curve return to its typical upward slope, ending an extended period of inversion. Inverted yield curves, where short-term yields exceed long-term yields, are often seen as recession indicators. Analysts noted, however, that the end of an inversion has historically been a more immediate precursor to economic downturns. Lisa Shalett, CIO at Morgan Stanley Wealth Management, suggested the yield curve’s normalization signals a shift from disinflationary growth to a reflationary environment. This transition could pose challenges for high-growth stocks, as higher long-term yields reduce the present value of future earnings. Higher yields and a strong dollar remain obstacles to higher stock valuations, Essaye noted. “Calm currency and bond markets are what stocks need to continue to rally, and we got the opposite last week,” he said. He added that clearer signals from the Federal Reserve or supportive economic data could help stabilize markets and pave the way for further stock market gains.

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.”