Market Sentiment Remains Cautious Ahead of Holiday Season
As the year draws to a close, U.S. stock index futures are trading with caution, with Wall Street entering a traditionally strong period. Despite this, few major catalysts are expected to drive market sentiment, and trading volumes are likely to be light in the final days of the year, potentially leading to choppy trading.
Holiday Trading Schedule
Stock markets will shut at 1:00 p.m. ET on Tuesday and will be closed for Christmas on Wednesday, which may contribute to the subdued trading atmosphere.
Futures Edge Higher
At 05:15 a.m., Dow E-minis were up 12 points, or 0.03%, while S&P 500 E-minis were up 7 points, or 0.12%, and Nasdaq 100 E-minis were up 38.25 points, or 0.18%. This modest growth comes after a stellar run to record highs following the U.S. presidential election, which sparked hopes of pro-business policies under President-elect Donald Trump.
Interest Rate Concerns
However, Wall Street’s rally hit a bump this month as investors grappled with the prospect of higher interest rates. The U.S. Federal Reserve eased borrowing costs for the third time this year, but signaled only two more 25-basis-point reductions in 2025, down from its September projection of four cuts. This has led traders to expect the Fed to leave rates in the range of 4% to 4.25% by the end of 2025.
The “Santa Clause Rally”
Markets are currently in a historically strong period, known as the “Santa Clause rally”. The S&P 500 has averaged a 1.3% gain in the last five days of December and first two days of January, according to data from the Stock Trader’s Almanac going back to 1969.
Market Uncertainty
Despite this, market participants are questioning whether U.S. stocks’ climb to new record highs will materialize in the coming days, amid concerns about the health of the market under the surface and sky-high valuations. The benchmark S&P 500 fell about 1% in December, while the equal-weight S&P 500, a proxy for the average index stock, is down 5.8%.
Vulnerable Stocks
“Expensive/unprofitable growth stocks and low-quality cyclicals appear to be the most vulnerable to potentially higher-for-longer interest rates and less liquidity,” notes Michael Wilson, equity strategist at Morgan Stanley.
Individual Stocks
Among individual stocks, U.S. Steel fell 2.3% in premarket trading as Nippon Steel’s $15-billion bid for the company has been referred to U.S. President Joe Biden, who has long opposed the tie-up.
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