Markets Set to Close Out Strong Year, But Will the “Santa Claus” Rally Materialize?
As the final two trading days of 2024 approach, the stock market is poised to end the year on a high note. The Nasdaq Composite has led the charge, surging over 30% so far this year, while the S&P 500 has risen more than 25%. The Dow Jones Industrial Average has seen a more modest gain of 14%.
A Quiet Week Ahead
This week, investors can expect a holiday-shortened trading week with limited news on the docket. Markets will be closed on Wednesday for New Year’s Day, and no major companies are scheduled to report quarterly results. Economic data releases will be subdued, with updates on housing prices and sales, as well as a look at activity in the manufacturing sector.
The “Santa Claus” Rally: A Statistical Anomaly?
Markets are currently in the midst of the highly anticipated “Santa Claus” rally, a seven-day period that has historically seen the S&P 500 rise 1.3% on average since 1950. However, this year’s rally has gotten off to a rocky start, with all three major averages selling off on Friday. The Nasdaq fell nearly 1.5%, and the S&P 500 is currently down less than 0.1% during the Santa Claus period.
Interest Rates and Their Impact on Stocks
Bond yields have been soaring in recent weeks, with the 10-year Treasury yield up more than 40 basis points in December alone. This has raised concerns among equity strategists, who believe that higher rates could begin to weigh on stock performance. Piper Sandler’s Michael Kantrowitz notes that a 10-year yield above 4.5% could become problematic for the markets.
Economic Growth and Earnings Expectations
Despite the recent drawdown in markets, the setup heading into 2025 remains largely unchanged. Stock valuations remain high, and earnings are expected to grow about 15% year over year for the S&P 500. US economic growth is also expected to remain resilient.
Market Sentiment and Volatility
Market sentiment, as measured by Citi’s Levkovich Index, has been increasing, pushing the index above the euphoria line of 0.38. This has raised concerns about stretched sentiment and valuations, which could make the market more susceptible to volatility. Strategists argue that if a catalyst emerges that challenges the bull thesis for 2025, the market rally could be put on thinner ice.
Weekly Calendar
Here is a look at the economic data and earnings releases scheduled for the week:
- Monday: MNI Chicago PMI, pending home sales, and Dallas Fed manufacturing activity
- Tuesday: S&P CoreLogic 20-City year-over-year and Dallas Fed Services Activity
- Wednesday: Markets closed for New Year’s Day
- Thursday: MBA mortgage applications, initial jobless claims, S&P Global US manufacturing PMI, and construction spending
- Friday: ISM manufacturing and ISM prices paid
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