The guy’s old. And I mean, really, really old: According to Google AI (which, for better or worse, is becoming an increasingly frequent by-citation contributor to this Perspective), Santa could be as old as 1,744. So you might want to cut him some slack if he forgot that he was supposed to stop by Broad and Wall to boost the stock market after dropping off that Nintendo Switch for your 12-year-old nephew. Old guys sometimes forget stuff like that.

Besides, who could blame the guy for not being in a festive mood, what with Party City filing for bankruptcy and all. (I’ve long suspected that he sometimes swings by stores like that late on Christmas Eve to pick up a few things when elf productivity drops, as it likely did during 2024's year of wage disputes, labor strife, and the like.) 

But even though Santa’s forgetfulness can be explained away by his advanced age or all the stress and slack created when the elves walked off the job in sympathy with Boeing machinists back in November just as the holiday crunch was starting to ramp up, it still doesn’t make the absence (so far) of a Santa Claus rally any less painful for those who choose to believe. To be sure, the Santa Claus rally is one of the most enduring myths on Wall Street, first identified in the early 1970s when the Stock Trader’s Almanac noticed a tendency for the stock market to perform unusually well during the last seven trading days of the year.

And even if the phenomenon is somewhat lacking in empirical support, it’s still notable that after a steep sell-off on Friday (and some carry-through on Monday), Santa Claus is still getting a lot of press this week, even though he should probably be playing golf in Florida by now. In fact, if 2024 ended today, this year would rank as the worst Santa Claus period since 2015. So, like any group of researchers with a healthy respect for the obscure, we spent time investigating the Santa rally this month and came away almost willing to believe that it exists, at least some of the time, and at least under ordinary circumstances.

But it’s a lot harder to tease out the reasons why it might exist than it is to simply express a grudging and conditional faith in it: Possible explanations offered by believers range from the simple and benign (retail investors taking charge of a thin tape while institutional investors jet away to Aspen to ski) to the cynical and depressing (window-dressing among asset managers anxious to spiff up their annual reports by buying this year’s best performers to impress their investors with their foresight in owning them).

Based on our research, most of these explanations fall short — even the one that theorizes that consumers who suddenly find themselves flush with cash from their holiday bonuses are overanxious to invest them (which, incidentally, is a hook to the all-time best holiday movie ever made: National Lampoon’s Christmas Vacation. Go ahead, Die Hard fans, change my mind...).

But the explanation we found most compelling was also the simplest and most heart-warming: Simple good cheer. That one holds that the Santa Claus rally relies on a general feeling of happiness that pervades all during the holiday period, which translates to a small updraft for equities — something for which our data provided at least a smidgen of support.¹

If that’s indeed the case, then it helps put this year’s failure of Santa to show up in lower Manhattan on December 26 into context: On Monday, the Conference Board’s final consumer confidence survey of 2024 fell well short of where analysts thought it should fall.² Most tellingly, the expectations component of that survey dropped nearly 12 points to 81.8 and is once again flirting with the 80.0 line that the survey-takers consider consistent with recession.

Another key Conference Board finding inside that report was that consumers are becoming less and less confident in the outlook for jobs. People recognize that today’s labor market is still pretty much just fine, a conclusion reinforced by continued improvement in the ratio of those who consider jobs “plentiful” versus those who consider them “hard-to-get.” But when asked about how they expect the job market to evolve over the next six months, consumers were singing a far different tune: Six-month labor expectations worsened “and returned to pessimistic,” an almost exact inverse to the plentiful-versus-hard-to-get dynamic that gets the most attention inside the Conference Board’s data.

And that punkish outlook also connects well to the second-most interesting piece of macro data we got last week: unemployment claims. Like the Conference Board’s data, Thursday’s weekly claims release from the Department of Labor tells a mixed story: Layoffs remain muted (weekly claims dropped back below 220,000 after legging significantly higher at the beginning of December,) but continuing claims rose to their highest level since November 2021 when the labor market was still in the process of righting itself from the once-in-a-generation disruption of the COVID pandemic.

So the nation’s wage-earners seem to be recognizing something that isn’t obvious in the headline data — specifically, if you’re one of the unfortunate few who find themselves out of work, it may take a little longer to become suitably re-employed than you’d prefer. Said differently, the continued softening of the job market is starting to pinch a little bit. And that might have been enough to keep Santa at home when he was supposed to be delivering our presents to the floor of the exchange.

Meanwhile, another lump of coal was evident in last week’s National Activity Index from the Chicago Fed (aka the CFNAI) for those willing to look hard enough to find it. Readers will likely recall that the CFNAI is similar in spirit to another release from the Conference Board – the Index of Leading Economic Indicators (or LEI). Like the LEI, the CFNAI tries to triangulate which direction the economy is headed by analyzing economic data released in the here-and-now.³ Also like the LEI, the CFNAI has recovered back into comfortable territory after oscillating between “recovery” and “recession” for an uncharacteristically long period of time. But last week’s CFNAI also showed something interesting: While the overall index remains comfortably above levels that might indicate trouble, the “diffusion” component — which measures how widespread weakness is (or isn’t) — has deteriorated fast and is once again flirting with levels that might be considered recessionary at the margin.

So, barring a big rally later this week, it’s starting to look like Santa might indeed be a no-show this year. You can blame the old guy himself if you want, but it’s starting to look like it might be the U.S. consumer (and the economy we underwrite) that is mostly responsible for the coal in our socks this year.

What to watch this week

We’ll be treated to a short week once again ahead of the New Year’s Day holiday on Wednesday. Markets close early on Tuesday and will remain closed on Wednesday in observance of the New Year’s Day holiday. Like last week, it would be reasonable to expect lower trading volumes (and potentially higher volatility) as trading desks worldwide operate with skeleton crews during the holiday-shortened week.

Before we get to the break, though, we still have a reasonably active macro calendar to contend with. On Monday, the Institute of Supply Management will release its Chicago ISM Business Barometer, one of the oldest and most well-respected PMI-type surveys on the monthly calendar. Like similar surveys, the signal imbedded within the Chicago PMI has wavered back and forth between expansion and contraction for months. Watch this week for signs that trends are once again weakening as the post-election boost to confidence starts to plateau — something that seems to be creeping in to other surveys as well.

We’ll also get several looks into the state of the manufacturing sector, beginning with the Dallas Federal Reserve Bank on Monday, final December manufacturing Purchasing Managers’ Index data from S&P Global on Thursday, and the Institute for Supply Management’s view on manufacturing on Friday. At the risk of repeating myself for the eleven-hundredth time, persistent weakness in manufacturing continues to be papered-over by equally persistent strength in services. We’ll have to wait until next week to find out if that remains true from the service sector’s perspective, but we should have a definitive answer about how the manufacturing sector closed out the year by the time you’ve switched out your 2024 calendar for 2025.

We’ll also have new housing-related data to chew on, starting with Monday’s pending home sales data and continuing into Tuesday with two reports on home prices. Last week’s new home sales release was mostly as expected,⁴ but this comment from the National Association of Realtors Chief Economist Lawrence Yun a week earlier caught my eye: Momentum for a near-term recovery in housing might be building as “consumers get used to a new normal of mortgage rates between 6 and 7%.”⁵ If he’s right, that could be good news indeed — it’s looking less and less like the Fed will be able to provide enough relief to push rates materially lower, which places a lot of pressure on a shift in mindset to conjure a sustained improvement in housing that could re-spark the demand side of the U.S. economy in a favorable way.

As we close out 2024, I sincerely hope 2025 will be a happy and prosperous year for all. Thanks again for being a loyal reader of this Perspective — it’s truly a privilege and honor to spend part of every week bringing it to your inbox.

Have a wonderful New Year.