Wall Street Wraps Up 2024 with Strong Gains Despite Year-End Decline
The stock market experienced a solid performance in 2024, yet concluded the year with a slight downturn.
With the year now complete, the S&P 500 (SNPINDEX: ^GSPC) recorded an impressive 23.3% increase, marking its second consecutive year of growth exceeding 20%. This remarkable achievement has not been seen since the 1990s. Notably, the index reached this milestone despite a downturn in the latter half of December, following the Federal Reserve’s revised forecast regarding interest rate cuts anticipated for 2025.
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The decline at the end of the year surprised many investors during a strong 2024. Historic trends, pinpointed by Yale Hirsch, the founder of the Stock Trader’s Almanac, highlight a common rise in the market during December’s final days, dubbed the “Santa Claus rally.” Although the term has broad use, Hirsch strictly defined it as the last five trading days of a year and the first two trading days of the new one. Hirsch first recognized this pattern in 1972 and associated its outcomes with the following year’s market performance.
The recent “Santa Claus period” wrapped up on January 3, resulting in a 0.5% loss for the stocks. This outcome may hold insights for the market in 2025.
Image source: Getty Images.
Understanding the “Santa Claus Rally”
From 1993 to 2023, the Santa Claus rally has accurately predicted the direction of the S&P 500 the following year in 23 out of 31 instances. Hirsch famously remarked: “If Santa Claus should fail to call, bears may come to Broad and Wall,” a nod to the famed New York Stock Exchange location.
The popularity of this indicator in Wall Street discussions reflects its relevance, though the reasons behind its correlation remain unclear. Increased activity by retail investors at year-end or strategic rebalancing by institutional managers may influence the trend. Moreover, investors’ sentiments, possibly influenced by year-end bonuses, often affect the market’s landscape.
Does a Missed Santa Claus Rally Signal Trouble?
Having a 74% success rate over the past three decades does not make the Santa Claus rally a guaranteed predictor. Just last year, during the same timeframe, the market saw a 0.9% decline, yet the S&P 500 finished 2024 up by 23%. This highlights the unpredictability of the indicator.
In fact, many analysts maintained a cautious outlook on stocks throughout 2024, yet the market’s performance surpassed all initial forecasts.
Looking ahead to 2025, analysts adopt a more optimistic view, setting a consensus target for the S&P 500 above 6,600, which suggests a rise of over 12%. Factors driving this optimism include the continuing AI boom and favorable business policies expected from the Trump administration.
Despite the bullish outlook, stock market valuations remain elevated. Potential influences from tariffs, immigration policies by the new administration, and the Federal Reserve’s stance on prolonged elevated interest rates could present challenges.
Overall, while the absence of a Santa Claus rally might cause concern, it is not a reason for investors to panic-sell their stocks. However, considering the historical significance of this predictor could be beneficial as one prepares for the possibility of market volatility in the upcoming year.
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Jeremy Bowman does not hold positions in the stocks mentioned. The Motley Fool also holds no positions in these stocks. For full disclosure, please see their policy.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Nasdaq, Inc.
