By Lewis Krauskopf
NEW YORK (Reuters) – With December so far delivering Scrooge-like returns in an otherwise stellar year for U.S. stocks, investors are hoping the end of 2024 offers some holiday cheer but are warning of potential headwinds.
The benchmark S&P 500 is up more than 24% for 2024 even after a big hiccup this week, and Wall Street has historically often enjoyed a strong year-end.
Since 1969, the last five trading days of the year, combined with the first two of the following year, have averaged a 1.3% gain in the S&P 500, a period known as the “Santa Claus Rally,” according to the Stock Trader’s Almanac.
But this year there are signs that Santa is disappointing.
The S&P 500 suffered its biggest one-day drop since August on Wednesday after the Federal Reserve caught investors off guard by signaling fewer than expected rate cuts through 2025.
Beneath the surface, the market also looks less healthy: Eight of the 11 S&P 500 sectors are in negative territory in December, while the S&P 500, a benchmark for the average index stock, is down 7%.
Another concern for stocks as the year draws to a close is rising Treasury yields, said Matt Maley, chief market strategist at asset manager Miller Tabak. The benchmark 10-year yield reached 4.55% on Thursday after the Fed meeting, the highest level in more than six months.
With the S&P 500 trading at 21.6 times forward earnings estimates, well above the historical average of 15.8, according to LSEG Datastream, that jump in rates will put more pressure on stock valuations.
“We’re ending the year with people finally facing the reality that the stock market is extremely expensive and the Fed is not going to be as accommodating as they thought,” Maley said.
Still, this week’s pullback could be positive as it takes away some of the frothy sentiment in stocks, setting the market “on pace for a recovery,” said Chuck Carlson, CEO of Horizon Investment Services. “If there are any more negative consequences, that could be a little more dangerous for the bullish trend.”
The Sinterklaas period, combined with the following first five trading days of January and January’s performance in general, is a harbinger for the year: when these three indicators are positive, the year has ended higher in more than 90% of the cases. according to the Almanac for the past 50 years.
But that seasonal strength may have come early this year, as the S&P 500 posted a blockbuster 5.7% return in November, driven by Donald Trump’s victory in the Nov. 5 presidential election, Carlson said.
