by Louis (Joe:) Krauskopf
NEW YORK (Reuters) – With December so far delivering miser-like returns in a stellar year for U.S. stocks, investors are hoping the end of 2024 will provide some holiday cheer, but are warning of potential headwinds.
The index is up more than 24% for 2024, even after a big tumble this week, and Wall Street has historically enjoyed strong annual closes.
Since 1969, the last five trading days of the year plus the first two of the following have averaged gains for the S&P 500 of 1.3%, a period known as the “Santa Claus Rally,” according to Stock Traders' Almanac.
But this year, there are signs that Santa Claus may disappoint.
The S&P 500 on Wednesday suffered its biggest single-day decline since August after the Federal Reserve surprised investors by signaling smaller-than-expected interest rate cuts in 2025.
The market also looks less healthy beneath the surface: Eight of the 11 sectors in the S&P 500 were in negative territory for December, while the equal-weight S&P 500, a proxy for the average of the index's stocks, was down 7%.
Another concern for stocks heading into the year is rising Treasury yields, said Matt Maley, chief market strategist at asset management firm Miller Tabak. Benchmark 10-year yields hit 4.55% on Thursday after the Federal Reserve meeting, their highest level in more than six months.
With the S&P 500 trading at 21.6 times forward earnings estimates, well above its historical average of 15.8, according to LSEG Datastream, this jump in yields will put more pressure on stock valuations.
“We finished the year with people finally facing the reality that the stock market is very expensive and the Fed is not going to be as accommodative as they thought,” Maley said.
However, Chuck Carlson, CEO of Horizon Investment Services, said this week's decline could be a positive because it wiped out some of the superficial sentiment in stocks, “setting the market up for a rebound.” “If there is more follow-through on the downside, it could be a little more risky to the upside.”
The Santa Claus period, when combined with the next first five trading days of January and January's overall performance, is a harbinger of the year: When these three indicators are positive, the year has ended on a higher note more than 90% of the time in 2018. The past 50 years, according to the calendar.
But that seasonal strength may have come early this year, given that the S&P 500 posted a huge 5.7% return in November driven by Donald Trump's presidential election victory on Nov. 5, Carlson said.
“It's been a strong year for the market, and you could say we got the year-end rally in November instead of December,” Carlson said.
Signs that the market's rally is increasingly tight could spoil any holiday cheer.
A number of mega-cap stocks performed well in December, including Tesla (NASDAQ:) and Alphabet (NASDAQ:), which are up 22% and more than 13% respectively so far this month. Broadcom (NASDAQ:) shares rose 36% for December after the company this month forecast booming demand for custom AI chips, pushing its market value above $1 trillion.
But such gains are becoming increasingly small. The number of S&P 500 components that fell outnumbered those that advanced for 13 straight sessions as of Wednesday, the longest losing streak of its kind in LSEG data that extends back to 2012.
In another troubling sign, the proportion of S&P 500 stocks trading above their 200-day moving averages fell to 56% as of Wednesday, the lowest level of the year, according to Adam Turnquist, chief technical strategist for LPL Financial (NASDAQ:).
“We recommend waiting until support is established and momentum improves before buying more on the dip,” Turnquist said in a note following Wednesday's sell-off.
