【MACRo Insight】Revealing the meaning behind the " US stock Christmas rally " - potential " five majo

In 2024, the development of artificial intelligence technology drove the stock market to one of its best annual performances in two thousand years !

However, the Fed's tough stance has brought challenges to the market, causing the three major U.S. stock indexes to plummet. Investors can't help but wonder whether this year's “Christmas miracle” can reverse the sell-off and put a perfect end to 2024. The Bank of America report shows that the second half of December is usually the second strongest period for U.S. stocks.

Due to the arrival of Christmas, the U.S. stock market will close early at 1 p.m. local time on Tuesday and reopen on Thursday, and will be closed again on New Year's Day. Trading activity is usually sluggish during the holidays, but Paul Hickey, co-founder of Bespoke Investment Group, pointed out that funds usually flow into the market during this period because people invest their bonuses and trade to minimize taxes.

Analysis by LPL Financial shows that December is the second-best month for the S&P 500 since 1950 (after November). The S&P 500 has risen 74% of the time in December since 1950, more than any other month. In election years, that number rises to 83%, according to Bank of America. These gains tend to be concentrated in the second half of December, earning them the nickname “Santa Claus Rally.”

However, there have been historical instances where the absence of a Christmas rally could signal a difficult period ahead for U.S. stocks. For example, market declines during typical holiday rallies in 1999 and 2007 served as precursors to the dot-com bubble and the 2008 financial crisis, respectively.

While the slight sell-off around New Year‘s Day last year was not a harbinger of future events, the S&P 500 is up 25% in 2024 and is currently on track for its fifth best year since 2000. Having reviewed the history and current state of the Christmas market, let’s turn to the five major trends in the U.S. economy and financial markets in 2025: employment, consumption, growth, inflation, and interest rates.

The U.S. labor market in 2024 presents a mixed picture. Despite a slowdown in nonfarm payrolls and a rise in the unemployment rate compared to 2023, the current state of the labor market is more positive than these two data indicators suggest. Weekly initial jobless claims have been very low, and there were more than 7.7 million job openings in October 2024, which would be a record high except for the COVID-19 period. These factors provide a favorable job market environment for 2025.

U.S. consumption has remained solid, driven by a strong labor market and rising wages, and it is likely to remain positive in 2025. Recent spending data has been positive, while consumer credit data show that consumers and households are in relatively good shape. U.S. retail sales increased by 4.1% year-on-year in November 2024, and personal consumption expenditures increased by 5.5% year-on-year, showing strong consumption.

According to the International Monetary Fund (IMF), real GDP growth in the United States in 2024 is likely to be higher than in 2023. Real GDP growth accelerated to an upwardly revised 3.1% in the third quarter of 2024, following a strong 3.0% growth in the second quarter. In the short term, the outlook is positive, with data from the Atlanta Fed's GDPNow showing that data as of December 20 indicate that US GDP growth in the fourth quarter of 2024 is likely to be 3.1%.

The year-over-year CPI inflation rate in 2024 is expected to slow compared to 2023, and looking ahead to 2025, CPI inflation may ease further based on the mild month-over-month inflation reported in recent reports. The current CPI inflation rate is well above the Fed's 2% target, however, according to Prestige Economics, the year-over-year CPI growth rate may slow in the second quarter of 2025 due to base effects. In addition, the average year-over-year growth rate of most consumer inflation indicators may be lower in 2025 than in 2024.

According to the December Federal Open Market Committee (FOMC) forecast, the federal funds rate will begin to decline in 2024, and the Fed will further cut interest rates in 2025. The market expects the Fed not to cut interest rates in January next year. However, the FOMC forecast still shows that the Fed may make two 25 basis point interest rate cuts in 2025.

Overall, the uncertainty of the Christmas market in the US stock market coexists with the positive trend of the economy in 2025. Despite political and geopolitical risks, the positive trend in 2024 provides a solid foundation for the economy and stock market in 2025. A continued strong labor market is likely to support consumption and growth in 2025, while falling interest rates may open the door for further rate cuts by the Federal Reserve.