In a market as technical as the current one, many will wonder if it makes sense to believe in “these things.” As one is of Galician descent, one has been accustomed to hearing at home that “meigas, existing, do not exist… But there are some! And in this case, the Christmas rally, of course it exists, you just have to look at the general pattern followed by the main world indices at that time of year. (I could bore you with facts and statistics, but I don’t think it’s necessary).
Why does this phenomenon occur? Well, many reasons are put forward, end of year tax strategiesinstitutional investors who take vacations during this period, leaving the market influenced by retail investors, (who tend to be more optimistic about the performance of the market and also tend to seasonally invest part of their Christmas pay)… Many explanations are given.
This year, in addition, another important circumstance occurs and that is that presidential elections have been held in the United States and it is also observed that statisticallythe main North American stock indices have an especially positive performance during the November-December period in presidential election years, outperforming the two-month average return by 2.1%.
Besides, no month is more likely to be higher than December in an election year (83.3%). But for this year there are more reasons: The last 10 times the S&P500 rose 20% or more through December, (as is the case this year), stocks rose in December nine times, with an average gain of 2.4% compared to December’s average gain of 1.5%.
So, with all these ingredients, to the question of “if this year we will have a Christmas rally”, I will tell you that, although we have been “rallying” for practically the last two years, if I have to get wet, I would say yes.
In the United States, the main indices are close to annual highs, the macro and micro environment seems stabilized and except for geopolitical issues, there does not seem to be any short-term reason for the market to fall… But…
Geopolitics is going to be key
Although recent news tells us that the conflict in the Middle East is tending to enter a stable truce, the situation in Ukraine is more tense. The escalation of war and dialectics between Ukraine and Russia has generated a lot of tension and an increase in volatility in the markets, although in recent days it has tended to decrease.
My impression is that both contenders are doomed to understand each other. Both are exhausted by the effort of a conflict that has lasted almost three years. Peror the most likely thing is that in the next few dates they will put all the meat on the grill to reach hypothetical peace talks (probably led by Trump) in the best situation to negotiate. Perhaps we are contemplating one of the moments of greatest tension without ruling out that it could worsen in the coming weeks. And this is not little.
In summary: moderate optimism thinking about the traditional Christmas rally taking place once again.
And in Europe?
Unlike what happens in the United States, European stock indices are far from highs. Europe is going through a difficult economic moment, and also a political one. The divergence between the US and Europe continues to be evident in the prices and it does not seem that this trend is going to change in the little more than a month left until the end of the year.
As for the Ibex, it is completing a good year driven above all by the banks, but as we have said on many occasions, in addition to its particularity due to the weight that financial entities have in it, it depends on the environment and what the rest do. of the benchmark indices, especially the European ones.
short term It is very possible that the idea will spread that the ECB is going to be more forced to lower rates to try to reactivate the European economy (especially Germany and France) because, in addition to the current situation, there are darker clouds in the form of tariffs coming from the US and China, something that would harm the large European export sectors and would not help to improve the already depressed current situation. This would be understood as a detriment to domestic banks, which would see their margins narrow at a speed perhaps greater than expected (see the Strategic Plan recently presented by CaixaBank). If the market perceives that, we will see a more depressed selective, therefore, we will see it more difficult to enjoy the famous Christmas rally in these latitudes.
And by 2025, what…
2023 and 2024 have been two exceptional years for the stock market, but thinking that every year we are going to grow above 20% seems a bit excessive to me.
In the end, Stock markets evolve based on expectations and global economic growth as a macro factor on which the results of companies as a micro factor will later depend has a lot to do with them.
It seems evident that most analysis teams and study departments assign lower economic growth for 2025 than for 2024. We are slightly less optimistic with expectations for results, although in the central scenario they still remain close to consensus estimates . And we believe that interest rates in the US are not going to fall as much as the market still expects. We will also see what happens with technology and especially with large companies, which let us not forget set trends in benchmark indices such as the S&P500.
Regarding the European stock markets, as we have said, we are not very optimistic with the economic situation in Europe and neither are we with the idea that the ECB is going to lower rates as much as is expected in the market.
Even assuming that inflation is trending under control and although we have doubts about rebounds that may occur in the coming months, in the world economy and especially in Europe old problems inherited from the great financial crisis are once again manifesting themselves, such as low potential growth, high levels of global public debt or the mediocre productivity performance.
We have said before that In the short term, it is very possible that in the coming weeks the idea will spread that the ECB will be more forced to lower rates to try to reactivate the European economy, but after Trump’s victory the idea seems to be established in the market that inflation can become persistent and even increase, especially if the foreseeably inflationary measures are confirmed. of his new Trump Administration. This will imply, if not higher rates, then a slower rate of rate reduction. And this circumstance can be a problem for Europe.