Holiday Cheer for Investors? Not So Fast
As the year draws to a close, investors are hoping for a festive finish to an otherwise remarkable 2024 for US stocks. However, warning signs are flashing, threatening to dampen the holiday spirit.
A Stellar Year, But December Disappoints
The S&P 500 has surged over 24% this year, despite a recent stumble. Historically, the final stretch of the year has been kind to Wall Street, with the “Santa Claus Rally” delivering an average 1.3% gain in the last five trading days of the year and the first two of the following year.
Fed’s Surprise Move Rattles Markets
This week, the Federal Reserve’s unexpected signal of fewer interest rate cuts in 2025 sent the S&P 500 tumbling, its largest one-day drop since August. Beneath the surface, eight of the 11 S&P 500 sectors are in the red for December, while the equal-weight S&P 500 has fallen 7%.
Rising Yields Add Pressure
Treasury yields are on the rise, with the 10-year yield hitting 4.55% on Thursday, its highest level in over six months. This jump will put additional pressure on equity valuations, which are already stretched, with the S&P 500 trading at 21.6 times forward earnings estimates.
A Reality Check for Investors
“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,” said Matt Maley, chief market strategist at Miller Tabak.
A Potential Rebound on the Horizon?
This week’s pullback could be a blessing in disguise, eliminating some of the frothy sentiment in equities and setting up the market for a rebound, according to Chuck Carlson, CEO of Horizon Investment Services.
Seasonal Strength in Question
The Santa Claus period, combined with the first five trading days of January and the performance of January overall, has historically been a strong indicator for the year. However, this year’s blockbuster 5.7% return in November, driven by Donald Trump’s presidential election victory, may have brought the year-end rally forward.
A Narrowing Rally
Signs of a narrowing market rally are emerging, with a few megacap stocks, such as Tesla and Alphabet, driving gains in December. Meanwhile, the number of S&P 500 components declining has outpaced those advancing for 13 straight sessions, the longest such losing streak in recent history.
Caution Ahead
Investors would be wise to exercise caution, waiting for support to be established and momentum to improve before stepping up to buy the dip, advises Adam Turnquist, chief technical strategist for LPL Financial.
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