"US Stock Market: No Santa Rally This Year, Pessimism Spreads"

Mixed Year-End and Early New Year Market Outlook Amid Fed's Signal to Slow Rate Cuts
Market Already Up Due to Trump Rally
Analysis Suggests Santa Rally Already Priced In

After the U.S. Federal Reserve (Fed) signaled a slowdown in the pace of interest rate cuts next year, causing a sharp drop in the New York stock market, Wall Street's focus this week is on whether a 'Santa Rally'?a rise in the stock market at the end of the year and early in the new year?will unfold.

According to Stock Traders Almanac, a stock analysis firm, on the 22nd (local time), the S&P 500 index has historically risen by an average of 1.3% during the last five trading days of the year and the first two trading days of the new year since 1969.

Wall Street's outlook is divided on whether a Santa Rally will take place again this time in the New York stock market. Pessimism is emerging that this year may not see a Santa Rally, which could serve as an indicator of investor sentiment early next year.

First, the impact of the Fed's indication of a slowdown in monetary easing is significant. Earlier, at the Fed's last Federal Open Market Committee (FOMC) meeting of the year held on the 18th, the Fed forecasted a slowdown in the pace of monetary easing next year. The Fed sharply reduced the expected number of rate cuts next year from four times of 0.25 percentage points each (a total cut of 1.0 percentage point) to two times of 0.25 percentage points each (a total cut of 0.5 percentage points). As a result, the S&P 500 index fell 2.95% on the 18th alone, marking the largest drop since August.

Debate over the market peak continues. According to market research firm LSEG, the S&P 500's 12-month forward price-to-earnings ratio (PER) currently stands at 21.6 times, significantly exceeding the historical average of 15.8 times. In December alone, eight out of the eleven sectors comprising the S&P 500 posted negative returns.

Moreover, after the Fed hinted at a slowdown in monetary easing, government bond yields surged, further weighing on investor sentiment. The U.S. 10-year Treasury yield, a global benchmark for bond yields, surpassed 4.5% for the first time in six months.

Matt Mielke, Chief Market Strategist at Miller Tabak, assessed, "Investors are closing out the year facing the reality that the stock market is extremely expensive and the Fed will not be as cooperative as we thought."

There is also analysis suggesting that the year-end Santa Rally may have been priced in earlier during the 'Trump Rally' that emerged after the presidential election on the 5th of last month. With expectations that President-elect Donald Trump's business-friendly policies would boost stock prices, the S&P 500 rose 5.7% in November alone.

However, last week the S&P 500 fell nearly 2%, and given that inflation?the reason cited by the Fed for slowing monetary easing?has eased more than expected, there remains some hope for a Santa Rally. The core Personal Consumption Expenditures (PCE) price index for November, released on the 20th, rose 0.1% month-over-month and 2.8% year-over-year, both below expert forecasts of 0.2% and 2.9%, respectively. Compared to October's figures (0.3% month-over-month and 2.8% year-over-year), the monthly increase slowed while the annual rise remained steady.

Chuck Carlson, CEO of Horizon Investment Services, said, "There may be claims that the year-end rally appeared in November, not December, due to the Trump Rally," but added, "Last week's stock decline could be positive in that it removed some of the bubble. The market is ready for a rebound."