As the holiday season approaches, Wall Street appears to be lacking the usual festive cheer, facing declining indices in a month typically characterized by gains. Both the S&P 500 and Nasdaq Composite have shown negative performance so far in December, defying historical trends where equities generally see an average increase of over 1%.
Analysts are wary that the S&P 500 is poised to end a seven-month rally, with the index struggling to remain above its 50-day moving average. This trend has raised concerns about the potential for a disappointing close to the year. Portfolio manager Justin Bergner from Gabelli Funds remarked, “There’s a lot of concerns that seem to be potentially hindering an end-of-year rally,” suggesting the market may be stuck in a phase of stagnation or minor fluctuations instead of a strong finish.
Several factors are contributing to the current malaise in the stock market. A tightening yield curve poses challenges as it could divert investors’ interests toward non-equity assets. The recent surge in long-dated Japanese bond yields, nearly doubling since the start of the year, has drawn increased attention from investors. Compounding this issue is speculation regarding the future leadership of the Federal Reserve. The possibility of National Economic Council Director Kevin Hassett assuming the Fed chair position raises fears of aggressive rate cuts, which might exacerbate inflationary pressures and subsequently push long-term bond yields higher.
“The bond markets and what they signal are very important for the economy and the equity markets now,” Bergner noted. He emphasized the need for a balanced yield environment, stating, “We need yields that are neither too hot nor too cold, and we need spreads that are neither too hot nor too cold.” As it stands, the current yield conditions are manageable, but uncertainty remains.
Additionally, there are looming concerns surrounding the Supreme Court’s upcoming ruling on tariffs, which could significantly impact market stability if the existing levies are deemed illegal. Market participants are also wary of high valuations, particularly in the artificial intelligence sector, which could signal an overinflated market that lacks sustainable growth.
Among the indices, only the Dow Jones Industrial Average seems on track to secure an eighth consecutive monthly gain, currently up by 0.9%. Conversely, the Nasdaq Composite is lagging behind, reflecting broader worries about the tech sector’s potential volatility.
Looking ahead, the forthcoming weeks may encourage a strategic shift in investments, with analysts suggesting that sectors like industrials and financials are likely to benefit from future developments. For instance, industrials may gain from ongoing data center investments, while financials could profit from the disparity between short and long-term interest rates. Bergner anticipates a continued migration towards value stocks as growth stocks face increasing scrutiny.
Despite the hurdles, some investors still hold onto the hope for a traditional “Santa Claus rally.” This term refers to a historical trend identified by Yale Hirsch, suggesting that the last five trading days of the year and the first two of the following year typically see an average gain of 1.3% for the S&P 500. However, recent trading patterns have raised doubts about whether this trend will persist this year.
As the market gears up for the Christmas week, investors will be carefully watching economic indicators, including upcoming GDP readings and industrial production data, which could influence market sentiment as the year draws to a close. Meanwhile, the NYSE will observe modified hours during the holiday, closing early on December 24 and remaining closed on December 25 for Christmas.
