We hope everyone had a Merry Christmas and Happy Holiday season.
The market commentary will explore market predictions, the Santa Claus Rally, and the current state of the markets heading into 2025.
It’s Difficult to Make Predictions, Especially About the Future
As we ring in the new year, it offers a psychological turning point. Whether it’s a new year’s resolution, or analysts resetting and making new market predictions, we often reflect on the past year in order to evaluate and move forward into the next year.
It is important to know that the financial markets do not understand the calendar, just like our scales don’t understand that January is when we are supposed to get into shape. Markets don't just fundamentally transform just because we've turned a page to a new year. They do not offer a reset or a fresh start. The forces that drive market movements—the law of supply and demand—operate independently of the months starting over.
So, predictions about what the markets will do in the next twelve months, or even what they will do in the next twelve days, are seldom accurate. Markets are counterintuitive, meaning they will do whatever they can to confuse the masses—and you.
With that being said, let’s move on to discussing what Santa has brought to the markets this year as we head into 2025.
Is Santa Coming to Town?
One popular phrase that is appearing in market news is the term “Santa Claus Rally.” Coined by Yale Hirsch in 1972, it refers to the stock market's tendency to rise during a specific seven-day period: the last five trading days of the year plus the first two trading days of the new year.
Since 1950, this phenomenon has occurred approximately 78% of the time, with markets rising an average of 1.3%.
The 2024-2025 Santa Claus Rally began promisingly with market gains on Christmas Eve. The S&P 500 rose slightly more than +1% to start the Santa Claus Rally period. Then, two days later, fell -1% and then was down as much as -1.6% on Monday.
While this commentary precedes the rally period's conclusion, it is unclear what the conclusion of the period will behold, but it is conclusive that Santa has brought some market volatility.
Why are the Markets more Volatile Now?
Since markets do not understand the calendar, the market does not know that it is supposed to rise to end the year. While it still could end Santa Claus period positively, markets have seen a boost in volatility.
The recent boost in volatility is a direct result of two factors:
1) An already weak broad market
2) Large technology stocks (“Magnificent 7” stocks) relieving overbought conditions
Since the beginning of December, the broad market has been weak compared to what the S&P 500 would lead investors to believe. As a matter of fact, the equally weighted S&P 500 is down -6.6% (through midday 12/30/2024). Meanwhile, the S&P 500 is only down -2.1%. Only 50% of S&P 500 stocks currently trade above their 200-day moving averages—the lowest percentage since November 2023. This marks a significant decline from the 75% level observed after November's election.
The 200-day moving average, a key indicator of long-term price trends, highlights a growing divergence between headline index performance and individual stock behavior.
In other words, while most stocks declined, a few heavier components have kept the index losses muted.
Those heavier components are the Magnificent 7 stocks, which are the largest seven capitalized companies in the S&P 500. Collectively, those account for more than 33% of the index’s fluctuations.
The reason that the market has seen more volatility is that those stocks had been technically overbought or extended and now are pulling back and leading to additional market weakness.
Does the Santa Claus Rally signal future strength?
The positive news is that regardless of what happens during the Santa Claus Rally period, it has no predictive value on the future of the market. We have already stated that markets cannot be predicted, let alone predicted based on one small seasonal trend. The Santa Claus rally’s occurrence or absence doesn't reliably predict market performance for the following year.
Consider the table below, produced by our team at Canterbury Investment Management:
Source: Canterbury Investment Management
This limited dataset (74 observations since 1950) reveals no meaningful correlation between the Santa Claus Rally and subsequent year performance. In general, markets tend to be positive year over year, and the Santa Claus Rally occurs often. Those two observations have nothing to do with each other. In fact, of the seventeen negative years recorded since 1950, fourteen were preceded by a Santa Claus Rally. This suggests that while the year-end pattern itself tends to occur, it offers little insight into future market direction.
Bottom Line
Heading into the new year, many investors are starting to get a little nervous, as shown by the latest Investor Sentiment Survey data. Sentiment data is shifting towards the bears. While this is considered a contrarian indicator, in that markets tend to move opposite of what the herd expects, it is a sign that investors are becoming increasingly pessimistic during a time of the year when optimism is normally high.
It’s speculation, but any future negative news is positioned to “spook” the markets. Markets are beginning to see large intraday swings and an increase in volatility. When volatility spikes, it is normal to see a few days of abnormal market trading. The big question is whether or not that volatility will settle down or begin to increase further.
Regardless of what happens in the markets, and we certainly have some more observations as to what could happen, it is important to maintain consistent portfolio volatility. That is why we employ an Adaptive Portfolio Strategy—one that aims to maintain stable volatility, regardless of what the market brings next.
Originally published December 30, 2024
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