Investors Got a Lump of Coal From Santa Claus. Is It a Warning Sign for 2025?

Wall Street had another smashing year in 2024, but the stock market finished with a whimper, rather than a bang.

With 2024 in the books, the S&P 500 (SNPINDEX: ^GSPC) gained 23.3%, its second straight year with a gain of at least 20%. That hasn't happened since the 1990s, and the index managed to deliver this strong performance despite weakness in the second half of December, which started after the Federal Reserve scaled back its forecast for interest rate cuts in 2025.

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That year-end decline may have caught some investors by surprise in a year as strong as 2024. In fact, Yale Hirsch, founder of the Stock Trader's Almanac, previously discovered the stock market's tendency to climb in the final days of the year, and he called it the "Santa Claus rally." While the term is often used loosely to apply to end-of-the-year performance, Hirsch gave it strict boundaries, defining the relevant period as the last five trading days of the first year and the first two trading days of the following year. Hirsch first observed the pattern in 1972, and he also found a correlation between the market's performance during the Santa Claus rally and its performance the next year.

The latest Santa Claus period ended on Jan. 3, with stocks shedding 0.5%. Here's what that could mean for the market in 2025.

Image source: Getty Images.

The significance of the Santa Claus rally

From 1993 to 2023, the Santa Claus rally accurately predicted the direction of the S&P 500 the following year 23 out of 31 times. Hirsch was confident enough in the indicator's forecasting ability that he was known for saying: "If Santa Claus should fail to call, bears may come to Broad and Wall," a reference to the intersection where the New York Stock Exchange is located.

The indicator has also gained enough popularity that it's often mentioned on Wall Street and in financial media at the end of the year, though there isn't a clear reason for the correlation.

It could be because retail investors are more active at the end of the year, or year-end rebalancing activity by managers could portend next year's performance. It can also reflect the general mood of retail investors or the size of end-of-year bonuses, some of which are likely to get invested in the stock market.

Is the Santa Claus miss a warning sign?

With a 74% hit rate over three decades, the Santa Claus rally is no hard-and-fast rule. Just a year ago, the stock market fell 0.9% during the relevant period, and as we now know, the S&P 500 finished 2024 up 23%. The Santa Claus indicator was wrong.

Similarly, most Wall Street analysts were relatively bearish on stocks in 2024, and the market's surge outperformed every Wall Street forecast from the start of the year.

For 2025, analysts are more bullish with the consensus target for the S&P 500 above 6,600, or a gain of more than 12%. They're betting on a continuation of the AI boom and friendlier business policies from the Trump administration.

However, valuations in the stock market remain high. Tariffs, mass deportations, and other policies from the new administration could also affect the market, not to mention the Fed's expectation that interest rates will remain elevated for longer than expected.

Ultimately, the lack of a Santa Claus rally shouldn't cause investors to sell their stocks. But it's worth keeping the predictive track record of the indicator in mind as you prepare your portfolio and your expectations for a potentially volatile new year.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.