The market enters the last two trading days of 2024, and stocks are poised to post another strong year of gains.
The Nasdaq Composite (^ IXIC) once again led the charge in 2024, rising more than 30% year to date while the S&P 500 (^ GSPC) increased more than 25%. The Dow Jones Industrial Average (^ DJI) is more modest than 14%.
A holiday-shortened trading week with limited news on the docket is expected to greet investors in the final trading week of the year. Markets will be closed for the New Year’s Day on Wednesday, and no major companies are expected to report quarterly results.
In economic data, updates on housing prices and sales, as well as a look at activity in the manufacturing sector, are expected to highlight a subdued week of releases.
But the stocks were not in the holiday spirit. All three major averages sold off on Friday, with the Nasdaq falling nearly 1.5%.
Since 1950, the S&P 500 has risen 1.3% during the seven trading days beginning Dec. 24, well above the typical seven-day average of 0.3%, according to LPL Financial Chief Technical Strategist Adam Turnquist. History has shown that if Santa Claus comes and the S&P 500 posts a positive return during the time period, January is typically a positive month for the benchmark index and the rest of the year averages a return of 10.4% .
When the S&P 500 is negative during that time, January does not end in the green, and the return for the next full year averages only 5%, according to Turnquist. Three days into this year’s Santa Claus period, which will close on Friday, January 3, the S&P 500 is down less than 0.1%
While history may be flashing a warning sign, it is known that last year the manifestation of Santa Claus did not materialize. January bad start as well. However, the S&P 500 is still poised to end the year up more than 20%.
As the markets have digested the Recent Federal Reserve Message that interest rates may be higher than investors have hoped, bond yields have increased. The 10-year Treasury yield (^ TNX) is over 40 basis points in December alone.
Hovering right above 4.6%, the 10-year is at its highest level in about seven months and in the territory where equity strategists believe that higher rates could start to weigh on stock performance.
“I think 4.5% or higher over the 10-year period becomes problematic for markets more broadly,” Piper Sandler investment strategist Michael Kantrowitz said in a recent video sent to clients.
“In the last couple of years, really markets have only fallen because of interest rate increases or inflation fears,” Kantrowitz said on December 18. higher taxes, not slower growth or higher unemployment.”
Despite the recent drawdown in markets since the Fed’s Dec. 18 meeting, the 2025 setup “hasn’t really changed,” Citi US equity strategist Scott Chronert wrote in a note to clients on friday
Stock valuations remain high. Earnings are expected to grow about 15% annually over the S&P 500, according to FactSet data, creating a “high bar” to impress investors. economic growth of the United States is widely expected to maintain resistance.
“Overall, investors seem bulled up in US stocks,” Chronert wrote.
This pushed market sentiment, as measured by Citi’s Levkovich Index, ever higher. The Levkovich Index, which takes into account investors’ short positions and leverage, among other factors, to determine market sentiment, is currently at a reading of 0.62, above the euphoria line of 0, 38, where the probability of positive forward returns is typically lower as the market appears tight.
For now, this is not shaking Chronert’s overall confidence in the US equity market. He noted that the “fundamentals” that drove the market rally remain intact.
But strategists argue that stretched sentiment and valuations put the market rally on thinner ice if a catalyst that challenges the bull thesis for 2025 emerges.
“Overall, this setup, plus the lack of a real correction in some time, leaves the market more susceptible to increased bouts of volatility,” Chronert wrote. “If the fundamental story holds, we will be buyers of the first half of pullbacks in the S&P 500.”
People photograph the New York Stock Exchange in New York’s Financial District on December 23, 2024. (AP Photo/Peter Morgan, File) ·ASSOCIATED PRESS
Weekly calendar
Monday
Economic data: MNI Chicago PMI, December (42.8 expected, 40.2 earlier); Pending home sales month-over-month, November (0.9% expected, 2% earlier); Dallas Fed manufacturing activity, December (-1.5 prior, -2.7 prior)
Earnings: No noticeable gains.
Tuesday
Economic data: S&P CoreLogic 20-City year-over-year, October (+4.11% expected, +4.57% prior); Dallas Fed Services Activity, December (9.8 prior)
Earnings: No noticeable gains.
Wednesday
Markets are closed for New Year’s Day.
Thursday
Economic data: MBA mortgage applications, week ending December 20 and week ending December 27, initial jobless claims, week ending December 28 (219,000 expected); S&P Global US Manufacturing PMI, final December (48.3 expected, 48.3 earlier); Construction spending month over month, November (+0.3% expected, +0.4% earlier)
Earnings: No noticeable gains.
Friday
Economic calendar: Manufacturing ISM, December (48.3 before, 48.4 before); ISM prices paid, December (50.3 prior)
Earnings: No noticeable gains.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
