Wall Street’s December opens cold, but a thaw may be around the corner

Wall Street opened December with a shiver, not a bang. The S&P 500 stayed flat, the Dow Jones Industrial Average slipped 0.17%, and the Nasdaq Composite eked out a 0.4% gain. Apple carried the Nasdaq to that slim victory, climbing 1.3% to hit a new 52-week high.

A cold open for stocks isn’t unusual, but December is no ordinary month for the market. Historically, it ranks as the third-best month of the year for stocks, according to the Stock Trader’s Almanac. In presidential election years, it punches up to second place.

The shaky beginning could be linked to tax loss selling. Investors unloading losing assets to offset capital gains is a familiar year-end dance. Bob Pisani of CNBC pointed out that this can drag markets down early in December. But this slump rarely lasts long. The back half of the month often sees a rally.

Fed rate drama looms large

Investors are laser-focused on Friday’s release of November’s jobs report. This will be the Federal Reserve’s last major data point before its December 17–18 rate-setting meeting. According to the CME FedWatch tool, there’s now a 72.9% chance of a 25-basis-point rate cut. That’s a significant jump from last week’s 59.4%.

The Fed has already slashed rates twice this year—a big 50-basis-point cut in September and another 25 in November. Yet not everyone is convinced more cuts are coming. CNBC’s Jimmy Cramer has flagged concerns about market complacency.

“The market might be getting too aggressive with its expectations for rate cuts,” he warned. Jim pointed to recent rises in inflation metrics like the consumer price index and personal consumption expenditures index. These suggest the economy may not be as fragile as some think, potentially giving the Fed less room to maneuver.

If the central bank does decide to trim rates again, the move could thaw Wall Street’s chill. A rate cut might give stocks the push they need to end the year on a high note. Adding to global market drama, South Korea faced a bout of political turmoil this week.

President Yoon Suk Yeol lifted emergency martial law on Wednesday after the National Assembly overturned his decree. Yoon had declared the measures during a heated budget clash with opposition lawmakers. The fallout hit South Korea’s markets hard.

The Kospi tumbled over 2%, and the won plummeted to a two-year low against the U.S. dollar before staging a partial recovery. South Korean stocks listed in the U.S. also took a hit before regaining some ground, and the infamous kimchi premium came to life in crypto markets.

AI mania and market risks

Now this year’s Wall Street rally has been turbocharged by AI stocks. Nvidia, the poster child of this trend, has soared over 180%. The company’s explosive growth alone accounts for about a fifth of the S&P 500’s gains this year. But not everyone is buying it. Joe Davis, chief economist at Vanguard, thinks investors may be overestimating AI’s immediate potential, and that the stock market is overheated.

“The U.S. stock market today is pricing roughly a 90% probability for AI’s impact,” Davis said. “We see that at closer to 60–65%.” He compared the current AI-driven rally to the dot-com boom of the late 1990s. Back then, soaring valuations eventually led to a massive crash.

“From an economic perspective, we’re in 1992. From a valuation perspective, we’re in 1997,” Davis said, pointing to the mismatch between long-term potential and short-term expectations.

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