Are markets heading for a Santa rally?

Macy's Santa Claus visits the New York Stock Exchange. Christmas appeared to come early this year, with the S&P 500 index jumping 5.7 per cent in November. Reuters

It's been another volatile year for stock markets but as December begins, investors typically set their worries to one side as they wait to see if they’re going to be given the gift of yet another Santa rally.

History shows they usually get exactly what they wish for, with shares rallying in the final weeks of the year.

But could 2024 bring rare disappointment? Christmas appeared to come early this year, with Wall Street’s S&P 500 index jumping 5.7 per cent in November.

That’s the best month of the year so far, as markets celebrated a clear-cut landslide election victory for Republican candidate Donald Trump. The triumphal “Trump jump” could prove a tough act to follow. We may already have had our fun. So what will December bring?

Even adults who don't believe in Father Christmas understand the power of the Santa rally, as December is the most wonderful month of the year. The S&P 500 has grown in 23 out of the past 30 years, according to figures from Fidelity International. Data from CFRA shows that, since 1945, the index has grown by an average 1.6 per cent in December, matched only by April.

Ed Monk, associate director for personal investing at Fidelity International, says markets can deliver a Santa rally even in the toughest times. “We got a festive bounce in December 2008, in the middle of the global financial crisis, and in both 2020 and 2021 despite Covid," he says.

Some pin this on thin trading volumes around the Christmas holidays, which amplify market moves, while Christmas bonuses can boost savings contributions. Others say it’s down to hedge funds chasing their end-of-year targets to keep clients sweet. It could just be down to seasonal good cheer, or maybe it is a self-fulfilling prophecy.

Four out of the past five Decembers have delivered festive joy. The Grinch-like exception was 2022, when the S&P 500 fell 5.9 per cent.

It suffered an even sharper drop in 2018, plunging 9.8 per cent. Even Santa can’t always be relied upon.

This year has been a rollercoaster for global markets, says Tony Hallside, chief executive at STP Partners. “Yet despite economic headwinds, including tightening monetary policies and geopolitical uncertainties, equities have shown remarkable resilience," he adds.

Is a fight between president-elect Trump and the Fed brewing?

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The S&P 500 ended November having climbed a bumper 27.19 per cent since the start of the year, with China’s Shanghai Composite up 13.56 per cent and India’s Sensex up 10.47 per cent. London’s FTSE 100 grew a more modest 7.32 per cent, while the Euro Stoxx grew just 5.76 per cent.

Mr Hallside says “easing inflationary pressures, robust corporate earnings in key sectors and strategic stimulus measures in China” boosted confidence.

“Yet 2024 wasn’t without its challenges, as high interest rates weighed on real estate, while geopolitical tensions in eastern Europe and Chinese trade policy uncertainties created volatility," he explains.

Prospects for a December rally appear “promising but not guaranteed”, Mr Hallside says. “Investor sentiment has turned cautiously optimistic, with easing bond yields and improving macroeconomic data creating a supportive backdrop.”

Two factors could affect the outcome. First, interest rates. Investors hoped for a string of rate reductions this year, but so far the US Federal Reserve has delivered just two – a 0.5 per cent cut in September and a smaller 0.25 per cent cut in November.

These have bought the federal funds rate to a range of 4.5 per cent to 4.75 per cent, down from 5.25 per cent to 5.5 per cent at the start of the year. The Fed’s next meeting on December 17 and 18 may determine whether investors are walking into a winter wonderland.

Mr Hallside says if policymakers grant investors a third cut, the December rally could really happen. “Conversely, lingering inflation or a stubbornly tight labour market could reignite concerns about prolonged tightening," he says.

So we may not know whether to expect a seasonal bump until the final days before Christmas.

The second factor is US president-elect Mr Trump and this is where Christmas becomes more complicated. Mr Trump, who will be inaugurated on January 20, has pledged to cut the US corporate tax rate to 15 per cent from 21 per cent and slash regulations, in what would be a huge boost for business and investor sentiment.

Yet he’s also raised the spectre of a nightmare after Christmas with threats to impose import tariffs of 60 per cent on Chinese goods and 20 per cent on Europe. Last week, he pledged to impose tariffs on Mexico, Canada and China from day one of his second administration.

Mr Trump is giving investors mixed messages, says Mohamed Hashad, chief market strategist at Noor Capital in Dubai. “His pro-business stance has buoyed investor confidence but his aggressive trade policies and tariffs could push up inflation and disrupt global supply chains.”

US tech, energy and financials may be the sectors to benefit, he adds. “Tech stocks should benefit from lower taxes, deregulation and continued advances in artificial intelligence. Fossil fuel producers may see a boost from relaxed environmental regulations, while renewable energy stocks could face challenges. Banks and other financials may also benefit from deregulation.”

Mr Hashad remains cautiously optimistic about the outlook for US shares, but trade tensions threaten Europe and China.

Goldman Sachs forecasts a 4 per cent rally at the end of the year for the S&P 500, driven by corporate share buy backs and private investors chasing the Trump trade. But Yufeng Qiu, senior trader at APM Capital, says “geopolitical tensions, higher interest rates and the Chinese slowdown” aren’t going away. “Markets will continue to focus on these in 2025, too.”

Investing is a long-term game and nobody should make decisions depending on whether they think the next month will be a good one or a bad one. It's hard to resist a little childlike excitement at Christmas, but don’t get carried away. January can be one of the weaker months of the year, as reality sinks in again.