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Wall St Week Ahead-Investors hope for 'Santa Claus' rally as stocks lose steam
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Wall St Week Ahead-Investors hope for 'Santa Claus' rally as stocks lose steam
Dec 22, 2024 6:30 AM

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Benchmark 10-year Treasury yields at highest level in over

6

months

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8 of the 11 S&P 500 sectors in negative territory in

December

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S&P 500 trading on forward earnings estimates well above

historical average

By Lewis Krauskopf

NEW YORK, Dec 20 (Reuters) - With December so far

delivering Scrooge-like returns in an otherwise stellar year for

U.S. stocks, investors hope the tail end of 2024 offers some

holiday cheer, but warn of potential headwinds.

The benchmark S&P 500 is up more than 24% for

2024, even after a major stumble this week, and Wall Street has

historically often enjoyed a strong annual close.

Since 1969, the last five trading days of the year combined

with the first two of the following year have yielded an average

S&P 500 gain of 1.3%, a period known as the "Santa Claus Rally,"

according to the Stock Trader's Almanac.

But this year, there are signs Santa Claus may

disappoint.

The S&P 500 on Wednesday suffered its biggest one-day

drop since August after the Federal Reserve caught investors off

guard by signaling fewer-than-expected interest rate cuts in

2025.

The market also looks less healthy beneath the surface:

Eight of the 11 S&P 500 sectors are in negative territory for

December, while the equal-weight S&P 500, a proxy for

the average index stock, is down 7%.

Another worry for stocks as the year winds down is rising

Treasury yields, said Matt Maley, chief market strategist at

asset manager Miller Tabak. Benchmark 10-year yields hit 4.55%

on Thursday following the Fed meeting, their highest level in

over six months.

With the S&P 500 trading at 21.6 times forward earnings

estimates, well above its 15.8 historical average, according to

LSEG Datastream, that jump in yields will put more pressure on

equity valuations.

"We're ending the year with people finally facing the

reality that the stock market is extremely expensive and the Fed

is not going to be as accommodative as they had been thinking,"

Maley said.

Still, this week's pullback could be positive because it

eliminated some of the frothy sentiment in equities, "setting up

the market for a rebound," said Chuck Carlson, chief executive

officer at Horizon Investment Services. "If there is further

follow through on the downside, that could be a little bit more

dangerous to the bullish trend."

The Santa Claus period, when combined with the following

first five trading days of January and the performance of

January overall, is a harbinger for the year: when those three

indicators are positive, the year has ended higher more than 90%

of the time in the past 50 years, according to the Almanac.

But that seasonal strength may have come early this year,

given the S&P 500 posted a blockbuster 5.7% return in November

driven by Donald Trump's Nov. 5 presidential election victory,

Carlson said.

"It's been a strong year for the market, and you can make an

argument that we kind of got the year-end rally in November

instead of December," Carlson said.

Signs that the market rally is increasingly narrow could

also spoil any holiday cheer.

A number of megacap stocks have performed well in

December, including Tesla and Alphabet, which

are up 22% and more than 13% respectively so far this month.

Broadcom ( AVGO ) shares are up 36% for December after the

company this month predicted booming demand for its custom

artificial intelligence chips, pushing its market value

over $1 trillion.

But such gains are increasingly sparse. The number of S&P

500 components that declined outpaced those that advanced for 13

straight sessions as of Wednesday, the longest such losing

streak in LSEG data that stretches back to 2012.

In another worrisome sign, the percentage of S&P 500 stocks

trading above their 200-day moving averages declined to 56% as

of Wednesday, a low for the year, according to Adam Turnquist,

chief technical strategist for LPL Financial.

"We recommend waiting for support to be established and for

momentum to improve before stepping up to buy the dip,"

Turnquist said in a note following Wednesday's selloff.

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