Will There Be A Santa Rally?

December, beyond the festive glow, is also a key month for the markets. The final weeks of each year are filled with hopes, strategic moves, and expectations for the famous “Christmas rally”. Yes, the well-known Santa Rally.

But what exactly is this Santa Rally that everyone eagerly awaits? And more importantly, is there a chance we will see it this year?

WHAT IS THE SANTA RALLY

Let’s begin with the basics. The Santa Rally is a historically observed phenomenon in which markets record gains during the last days of December and the first days of January.

Where does this come from? It is mainly linked to investor optimism, the positive holiday mood, the low trading volume, and year-end portfolio rebalancing.

Just consider this: the FTSE 100 posted a positive return in December in 24 of the last 30 years, according to Fidelity. Meanwhile, the S&P 500 finished December in the green more than 73 percent of the time over the past 75 years.

In short, if there is one month when gains tend to appear, it is December. Of course, as always in investing, nothing is guaranteed.

WILL WE SEE IT THIS YEAR?

And here comes the key question: “Will we see a Santa Rally this year?” November began with sharp declines, as markets came under pressure from two factors: the fatigue surrounding the AI hype and negative comments from the Federal Reserve, which reduced expectations for immediate rate cuts.

The S&P 500 hit a monthly low on 20 November, falling to minus 4.4 percent. Yet it managed to stage an impressive recovery and ended the month slightly positive at plus 0.1 percent, marking the largest reversal in the history of November from negative into positive territory.

What caused this turnaround? A major factor was the economic data released during Thanksgiving week, which showed signs of easing inflation. This reignited hopes for an aggressive shift by the Federal Reserve, with markets now pricing in an 87.4 percent probability of a rate cut in the US.

Looking back at history, in many years the market bottomed around 20 November and from that point moved upward until year-end. In fact, December is the month with the highest probability of being positive for the S&P 500, with a success rate above 73 percent.

This year followed that exact pattern. The S&P 500 reached its lowest level on 20 November and has been climbing steadily since.

Historically, whenever this occurred, December ended up in the green. If that is not encouraging, what is?

And it is not just the statistics. The S&P 500 recorded its best weekly performance since April, with a rise of plus 3.7 percent. Sentiment has clearly improved and investor confidence seems to have returned.

BUT.

We should not rush to conclusions. The uncertainties are still there. Investors remain concerned about stretched valuations in AI-related stocks, and even the European Central Bank warned about “sharply synchronized corrections” in AI equities driven by FOMO.

So yes, Santa may arrive with gifts, but he might just as easily bring a cold shower for the markets.

Posted Using INLEO