Tough start to the new year
Stocks playing catch-up with bond market sell-off.
Bottom line
The S&P 500 enjoyed a powerful price-only gain of 23.3% in 2024, combining with 2023’s increase of 24.2% for the best performance in consecutive years since gains of 31% and 26.7%, respectively, in 1997 and 1998. The highlight of last year was when stocks rallied hard by more than 19% from the market’s bottom on August 5 to a record high on Dec. 6—its 57th of the year—as some investors began to enthusiastically discount a change in leadership in Washington. But benchmark 10-year Treasury yields began to soar from 3.6% in mid-September to the high 4.70s, as the bond vigilantes began to worry about the Trump administration’s fiscal policy plans, sticky inflation, a resurgent labor market and a projected slower pace of Federal Reserve rate cuts.
So, it appears that stock investors finally received the bearish Christmas letter their bond colleagues had mailed, along with a lump of coal, a stale slice of fruitcake and a glass of curdled eggnog. Over the last five weeks, the S&P has corrected by 5%, delivering downbeat results for the Santa Claus Rally and the Early January Barometer indicators.
‘If Santa Claus should fail to call, bears may come to Broad & Wall' The Stock Trader’s Almanac defines the Santa Claus rally as the last five trading days in December and the first two trading days in January. Over the past 55 years since 1969, the S&P has been positive over this seven-day period 42 times (76%) by an average of 1.3%. This year’s results were negative for the second consecutive year, with a nominal return of -0.53%—the twelfth worst on record. But in the 13 years in which the Santa Claus indicator started the year negative, the S&P finished the year in positive territory 69% of the time (9 of 13).
Negative results for ‘Early January Barometer’ Historically, as the first five trading days of January go, so goes the full year. Since 1950, The Almanac reports that 69% of the time (52 out of 75), the direction of the full year—up or down—is the same as that of the first five trading days of January. When that period is positive, the S&P has finished the year in positive territory 83% of the time (40 out of 48). But when negative, stocks still managed to finish the year in positive territory 56% of the time (15 out of 27).
Quirky calendar On the surface things look at least OK. The S&P posted gains of 0.62% in the first five trading days. Yet the calendar was odd due to mid-week market closures, leading many investment professionals to take longer-than-typical holiday vacations. Also, the stock market closed on Jan. 9 to honor the passing of former President Jimmy Carter.
Lastly, because Jan. 3 was the first Friday of the month, the Labor Department decided to release the December nonfarm payroll report a week later than usual, pushing it to Jan. 10. It was much stronger than expected, sparking a sharp -1.54% decline in the S&P. In our view, the equity market would have responded similarly had the employment report been released Jan. 3. Calculating an adjusted Early January Barometer of six trading days from Dec. 31, 2024 through Jan. 10, 2025, the S&P declined -0.93%.
Post-election hangover Over the first five trading days of each of the 18 post-election years since 1950, the S&P declined by an average of -0.26%, though the full year subsequently rose by an average of 7.9%. But in 14 of those years (78%), returns began and ended in the same direction as their Early January Barometer signal. Investors should take comfort in this data during a volatile period such as this year.
Company guidance will be important The reporting season for the fourth quarter of 2024 starts this week. At the end of September, the FactSet consensus expected profits to grow by about 14.5% on a year-over-year (y/y) basis. But those estimates have slowed to an 11.7% y/y increase. If achieved, that would mark the highest growth rate since the fourth quarter of 2021. Revenues, in contrast, are expected to increase by 4.7% y/y, compared with the 5.2% y/y forecast made at the end of September. If reached, it would be the 17th consecutive quarter of revenue growth. So, net profit margins are expected to expand to 12%, compared with 11.3% growth projected a year ago.
Fiscal policy matters There’s a new sheriff in town promising to deliver economy-friendly fiscal policies over the course of 2025. They could include sharply reduced regulations, an extension of the 2017 corporate and individual tax cuts, increased energy exploration and production, among others. We are more sanguine than most about Trump's threats of tariffs, as we think he is using them as a negotiating tool.
All told, we’re expecting full-year earnings for the S&P to grow 10% this year to $275 (from an estimated $250 in 2024) and 12.7% to $310 in 2026. Our target price for the S&P for 2025 remains at 7,000. We believe the welcome correction in volatile stock prices we’ve experienced over the past few weeks could represent an attractive entry point for longer-term investors.
More to come We’ll return with January Barometer Part II in early February to assess the potential market direction and likely top-performing industry sectors for the full year.