The history of the U.S. stock market shows that most years experience a "Christmas rally," putting investors on the side of "good boys." In 2024, the AI boom propelled the stock market to one of its best annual performances in two millennia, but last week, the Federal Reserve's tough stance dampened the market, causing a sharp drop in the three major U.S. stock indices. This has made many investors wonder whether the previous years' "Christmas miracles" can erase the selling wave and end this year on a perfect note.

A recent report from Bank of America indicates that the second half of December is typically the second strongest period for U.S. stocks. Due to Christmas, U.S. stocks will close early on Tuesday at 1 PM local time and will reopen on Thursday, with New Year's Day being another market holiday.

Trading activity during the holiday season is often relatively sluggish. However, Paul Hickey, co-founder of Bespoke Investment Group, believes that funds usually flow into the market during this period as people invest their bonuses and engage in trades to minimize taxes.

He also stated that the company's valuation is relatively stable due to the decrease in company news, which is also a factor. Recent analysis by LPL Financial shows that since 1950, December is $S&P 500 Index (.SPX.US)$the second best-performing month (only after November).

The stability of these holiday market rallies is also noteworthy. According to LPL's data, since 1950, the S&P 500 Index has a 74% chance of rising in December, higher than any other month. Data from Bank of America shows that in election years, this number rises to 83%. These increases often concentrate in the second half, thus being referred to as the "Santa Claus rally."

LPL's George Smith wrote, "During the first half of December, stock prices average flat or even decline, then on average, they rise in the second half of December (momentum builds around the 11th trading day of the month)."

The absence of a Christmas rally could signal trouble.

However, when Santa Claus does not bring 'gifts' to Wall Street, it may signal a difficult period ahead for US stocks. The market declines in 1999 and 2007 during typical holiday uptrends became precursors to the Internet bubble and the 2008 financial crisis, respectively.

However, the slight sell-off around last New Year's Day is not a harbinger of future events. Despite a decline of about 1.5% in that month, the S&P 500 Index rose by 25% in 2024 and is currently on track to achieve its fifth-best year since 2000.

Last Sunday, Bank of America stated that the Federal Reserve's last meeting of 2024 could be "the last hurdle for the Christmas rally," which the market failed to overcome. However, the report also mentioned that the cost of hedging the year-end rally using S&P 500 Index Options has never been so low since the pandemic.

Gonzalo Asis, Stephen Juneau, and Ohsung Kwon from Bank of America wrote: "Therefore, we are bullish on the S&P 500 Index for year-end upside hedging, firstly to replace and lock in some stock profits, or to increase the exposure of large technology stocks with limited risk for investors who may have already started withdrawing from technology stocks."

However, retail traders need to be aware that reduced holiday trading volume may bring higher risks. Prices may fluctuate faster and more dramatically as investors attempt to expand or exit positions.

Editor/Rocky