The Santa Rally 2024: What to Expect? 

Wow, it sometimes feels like 2024 has flown by, with so much happening in markets and so many major historic events. One thing is for sure, and that is the enduring performance of US stocks which have astounded every Wall Street analyst, bar none. With the benchmark S&P 500 index up over 23% year-to-date^[1], can the traditional Santa rally propel stocks to fresh new highs? 

Key Points 

• The S&P 500 has climbed over 23% year-to-date, with 47 record highs, driven by resilient economic data, rate cuts, and optimism about a soft economic landing. 
• December is statistically the best-performing month, with a 78.9% chance of S&P 500 gains in the last week since 1950, often extending into early January. 
• Trump’s decisive victory boosted markets, with expectations of tax cuts, deregulation, and economic stability enhancing bullish momentum. 

Historical Data 

Strong historical performance for the S&P 500 

December has always brought with it a good feeling, and this has historically been the case for stock markets too. Views are split as to the reasons why this boost occurs, but the last month of the year is typically a good time for stock market bulls.  

The ‘January Effect’ is a big reason, that is when traders eagerly buy stocks in December, envisioning a January rally. This behaviour is grounded in the belief that stocks, especially the smaller ones, tend to put on a show at the start of the new year.  

The festive season between Christmas and New Year often brings a wave of optimism which leads many to buy more stocks with their year-end bonuses, hoping for future gains. Finally, big players like institutional investors and large funds often have to execute year-end portfolio rebalancing, as the calendar flips. 

December’s resilience as the month with the highest average returns ^[2]

According to the Stock Trader’s Almanac, November is the start of the best six-month period for US stocks. It has been the best month for the S&P 500 and second best for the Dow Jones Industrial Average since 1950. It has been the second-best month for the tech-heavy Nasdaq Composite Index since 1971. 

In fact, digging further into the finer details, markets increase in value specifically during the last week of December and into the first two trading days of the new year. Research shows that since 1950, this single seven-day period has produced a positive return for the S&P 500 78.9% of the time. No other similar duration of trading sessions is more likely to be higher. 

Historical insights from 2023’s rally

The late 2023 rally kicked off in November when the broad-based S&P 500 jumped by nearly 9% ^[3]. The index then went on a five-month bull move higher, breaking to record highs in January, from where it hasn’t really looked back. 

A soft landing of the economy was being talked about as US GDP remained solid, even though recessionary fears were rising. It was thought that US consumers may struggle but that theme didn’t come to fruition. Positive seasonality and the extremely rare occurrence for the S&P 500 to close lower for two consecutive years, then saw a prolonged Santa rally continue into the start of 2024. 

Did the Santa Rally Come Earlier This Year? 

There’s no doubt this year has been one for the record books! There have been only two months in 2024 in the red, April and October, with an unending stream of all-time highs. Economic data has remained resilient with the US consumer particularly hardy. Remember that consumer activity represents nearly 70% of US GDP, so markets were really supported by this theme ^[4]. 

Interest rate cuts by the Fed also helped as inflation came down much closer to the central bank’s 2% target^[5]. Market fears about a hard landing dissipated and policymakers went all in on trying to achieve a soft landing. Indeed, a ‘Goldilocks’ economy, one which is neither too hot nor too cold but just right, played out. Moderate growth and lower inflation allowed for market-friendly monetary policy, even though the odds of further rate cuts have been reined in with the election result.  

Key drivers of the early rally 

The major driver of the ongoing rally in recent months has been the definitive election victory by Donald Trump. Financial markets began to move decisively a few months before polling day, as betting markets moved heavily in favour of a Republican win. The ‘Trump Trade’ really kicked into gear with the dollar, stocks, crypto and other risk assets rallying hard. 

A solid third quarter results season, with margin expansion and more positive earnings revisions than forecast, also underpinned support for stocks. 

With markets so buoyant already, expectations are high that stocks can crown the year with yet more all-time highs. Bullish momentum is exceptionally strong at present, so new peaks seem like a given, especially as the indices aren’t overbought on a technical basis. 

Record levels of corporate buybacks are suppressing volatility and reducing equity drawdown risk. Valuations are high but can remain elevated. Market breadth has also broadened so that the major indices are no longer as heavily reliant on a handful of stocks (the ‘Magnificent Seven’) driving prices higher. That phrase referred to the megacap tech titans which have dominated the stock markets over the last few years. 

Current Market Sentiment 

2024 market trends 

This year has seen markets veer quite broadly between soft, hard and then soft landings once more. Pricing of a Fed interest rate cut in December have moved lower since Donald Trump won a second term in the Oval Office. Money markets currently price in around a 70% chance of a 25bps rate reduction at the FOMC meeting on 18 December^[6]. Additional policy easing has also been reined in for 2025. There is around a two in three chance of a pause in monetary policy at the January FOMC meeting, if rate setters do cut next month. 

Effects of the US Election 

The November Presidential election had a major impact on stock markets some time before November. Risk assets certainly benefitted from Donald Trump’s decisive victory as this stopped any uncertainty from a much closer result. His potential policies of business and individual tax cuts have given risk-taking a big lift, although there is some confusion around what will eventually happen once Trump assumes office. 

Equity markets are probably most excited about deregulation, while tariffs are seen as a potential negative, though the President-elect’s Treasury Secretary pick, Scott Bessent, is seen as being more of a proponent of ‘tariff gradualism’. 

How Are Financial Markets Responding? 

Markets have already responded to the ‘Trump Trade’ and possible policies of protectionism, lower taxes, deregulation and immigration. The dollar hit two-year highs while bitcoin hit record levels which caused gold to sink a few weeks ago. 

The next few months may see increased volatility as Trump 2.0 checks out how the market is reacting to certain announcements and positions in the new administration. Immigration policies might also disrupt markets as they will have an impact on growth, labour supply and costs. Markets could also move on any progress in peace talks in the Middle East or around the Ukraine/Russia conflict.  

Will the Santa Rally Come in Play Again in December? ^[7]

Statistically, it is likely that we do see another rally into year end, even though the bull run this year has already been extraordinary. US economic data continues to tick along with the Atlanta Fed GDP. Now for the final quarter of 2024 forecast at a very healthy 2.7%. Recent inflation is proving modestly sticky but is not far away from the Fed’s 2% target. Questions around where the neutral rate for interest rates will continue, with most economists reckoning it lies somewhere between 2.5% and 3%. 

Key data will be the November monthly non-farm payrolls report which is released in the first week of December. This is then followed by CPI and PPI data the following week, with the FOMC meeting on 18 December. The labour market figures come after the disruptions from hurricanes and strikes in the prior report. This data will be instrumental in setting the scene for policymakers. At present, most officials appear to be in no rush for more monetary easing in the new year, with a heavy emphasis placed on incoming data and the likely impact of Trump’s policies on the economy. 

Conclusion 

This time of year is always fun for markets as traders, investors and fund managers begin to assess their performance and what is required to be done in the coming weeks. The defining event of 2024, the US election, has set the scene for a likely period of volatility as stock indices move on policies and tweets of the new Republican president. Bullish momentum appears to remain strong with the US economy in far better shape than any of its peers. It appears that ‘US Exceptionalism’, at a time of broad uncertainty in Europe and China, chimes well for US stocks markets to continue higher. 

Ready to ride on the Santa Rally? Open a live account with Vantage today and discover the potential of going both long or short position on some of the largest companies in the US markets through contracts for differences (CFDs) at $0 commissions. 

References