The Stock Market Did Something for Just the Third Time Since 1950. Here's What History Says Will Happen in 2025.

The stock market has been on quite a tear over the past couple of years, with each major market index hitting new heights in 2024. In fact, as recently as early December, the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) closed at new all-time highs, spurred on by comments from Federal Reserve Chair Jerome Powell, who noted at the time that the U.S. economy is in "remarkably good shape."

However, since that peak, which occurred about a month ago, the stock market has struggled, with all three major market indexes slipping into the red. This represents a worrying trend for investors, as history suggests there could be challenging times ahead. In fact, the market has done something for just the third time since 1950, and the data is clear about what investors should expect next.

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Santa Claus has left the building

Even as the market struggled heading into late December, investors were hoping for a reprieve courtesy of a Santa Claus Rally, which occurs during the last five trading days of December and the first two trading days of January.

The term was first coined by Yale Hirsch in the "Stock Trader's Almanac" back in 1972. A review of the data dating back to 1950 found that during that seven-day trading period, the S&P 500 climbed roughly 1.4%, on average, finishing higher almost 80% of the time. Following a positive Santa Claus Rally, the S&P 500 has gained 1.4% in January and 10.4% for the year, on average, according to an analysis conducted by LPL Financial.

On the flip side, however, the lack of a rally during that period can be a harbinger of difficult days ahead for investors. In years without a Santa Claus Rally, the S&P 500 has fallen in January, and returns for the year came in at 5%, on average. To put that in historical context, the S&P 500 has returned 8%, on average (excluding dividends).

Hirsch noted the correlation in his original missive: "If Santa should fail to call, bears may come to Broad & Wall," referring to the location of the New York Stock Exchange. In other words, if there's no Santa Claus Rally, the market has generally been flat to bearish in January and generated tepid returns during the following year.

This marks just the third time since 1950 that the Santa Claus Rally has failed to make an appearance for two or more consecutive years, and it is likely a precursor to a market correction.

The other side of the coin

Despite these somewhat bearish indicators, there are a number of reasons to be optimistic.

• President-elect Donald Trump has promised to extend a number of favorable tax cuts enacted during his first term, which many believe will boost the economy.
• The incoming administration is also expected to slash regulations and create a more business-friendly environment.
• A robust economy will likely continue to boost corporate profits, which have driven the market higher.
• The Federal Reserve Bank's campaign to continue lowering interest rates is expected to boost business spending, further fueling economic growth.
• The ongoing adoption of artificial intelligence (AI) is expected to continue, increasing productivity over time and driving additional growth.

This is all a long way of saying that despite the glaring absence of the Santa Claus Rally, all is not lost for investors hoping for stock market gains in 2025.

In fact, the data is mixed with regard to how the market will perform over the coming year. For example, going back to 1928, in years following double-digit gains, the S&P 500 has returned 10%, on average, which seems to suggest the potential for upside in 2025.

There's more. We just started the third year of the current bull market on Oct. 12. Since bull markets tend to last for five years, on average, that too seems to suggest the potential for upside.

Here's why investors should stay the course

Trying to time the ups and downs of the market is fraught with peril. The good news is that while the potential for a market correction exists, these events are normal and necessary and part of the cost of admission for being an investor. In fact, a market correction -- or a pullback of 10% or more -- has occurred in 10 of the past 20 years, helping to illustrate just how common corrections are.

Taking a step back can be instructive. The bull market that began in 2009 and continued until 2020 ran for more than 11 years, delivering gains of more than 400%. During that same period, the market experienced declines of 10% or more on 15 separate occasions. So, while investors can expect a significant decline over the next year or so, that likely won't impede the current bull market run.

The next correction is a matter of when -- not if. But the secret to success in the market is buying stocks in the best companies you can find and holding on for dear life.

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Danny Vena 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.