Someone check the stocks. They might be unplugged, like so many strands of Christmas lights whose time to shine has come and gone for another year.
US shares trundled through another lackluster session to start New Year’s week, further dampening hopes for a so-called “Santa Rally.” Equities, history (or legend) has it, “should” rise over the final five sessions of the outgoing year and during the first two trading days of the new calendar.
Alas, the S&P was on track for a third straight decline, and as the simplest of simple figures (below) reminds you, the hawkish spin Jerome Powell and co. imparted to December’s rate cut was something of a “bah humbug” moment.
For whatever it’s worth (not a lot if you ask me), half a century of history shows the S&P typically rallies nearly 1.5% during the seven-session “Santa” stretch, with a very high hit rate. If this year’s an exception, don’t fret: As the chart text reminds you, stocks have delivered plenty for investors in 2024 without tacking on another 140bps for the sake of the season.
To say it’d be foolish to analyze thin post-Christmas, pre-New Year’s Eve trading would be an understatement. There’s really no point in “clocking in” during this stretch, a period when anyone who’s anybody on Wall Street’s enjoying a lengthy vacation.
That said, bond yields, which are closing the year meaningfully higher versus December of 2023, are probably a source of consternation for an equity rally that’s “stretched” on any number of definitions, including and especially those related to valuations. (Bonds at least had the decency to rally on Monday.)
As the figure shows, 10-year yields are nearly 75bps higher versus this time last year.
“The New Year will commence with the highest 10-year Treasury yield to start a year since 2007,” JonesTrading’s Mike O’Rourke remarked, adding that 10-year US yields are more than 60bps above the S&P 500 earnings yield” which suggests “some combination of equities correcting and/or Treasurys rallying is due to play out in early 2025.”
It’s a cliché (and, in some respects, an analytical cop out) to cite “year-end flows” and/or “position-squaring” to explain the price action in late-December, but there’s some truth to that sort of banality, so I won’t deride sundry market wraps you might’ve perused on Monday.
I’d also note, in passing and in closing, that it’s (more than) fair to suggest at least some investors are beginning to wonder if their luck’s running out, what with market pricing now indicative of fewer than two Fed cuts in 2025 and in consideration of what’ll very likely be another drama-filled year if not necessarily in markets, then almost surely on the (geo)political stage. Remember: Geopolitics never matters for markets until it does.
