Looking Back at December and an Engaging Look Ahead to 2025

Picture of Chris Grellas, CFP®, MSFA

Chris Grellas, CFP®, MSFA

Chris Grellas CFP®, MSFA is co-founder and financial advisor at ProsperPlan Wealth, bringing over a decade of experience in retirement planning, tax-efficient strategies, and investment management. He holds a Master of Science in Financial Analysis from the University of San Francisco.

Happy 2025 from your team at ProsperPlan Wealth!

A quick note before I begin, for additional news, updates and information about investing, retirement, the economy, or your relationship with ProsperPlan Wealth, please friend us on Facebook or follow us on X.

Let’s get started. As we are well into the year, it’s understandable if you are entirely focused on what’s ahead.

But because the last month of any individual year often has its own economic micro-climate – which can differentiate it from the other months of the year – our team here at ProsperPlan won’t leave you in the dark on our December 2024 recap.  

Rest assured, if a look ahead to 2025 is more to your liking, we’ve accounted for that in this market update, as well.

For those readers and clients who want to know what’s next, we’ve included a first-of-its kind video by Cameron Dawson, the chief investment officer at our sister company NewEdge Wealth.

Among other highlights and analyses, Dawson musically articulates the answers to three of the biggest economic and market questions of 2025, including:

· Will the U.S. economy experience a recession, a slowdown, or a reacceleration this year?

· How will the new administration’s fiscal policy impact the economy and the markets?

· What will the ideal path of returns be for risk assets in 2025?

As we are constantly evaluating new or unique sources of financial education and information, we have become keen admirers of Dawson’s creative take on the economic and market trends that matter the most to investors. So, if you have a few minutes, we enthusiastically encourage you to give NewEdge Wealth’s 2025 Preview a look.

Now, back to December and the impact of that month on where we stand now.

From our home office in Gold River, California, we have spent a large amount of time analyzing December’s performance of the financial markets, and what we’ve identified are the influences of a unique blend of seasonal trends, specific economic pressures, and investor anticipation for the arrival of 2025.

First, you may be aware that there is an almost yearly market phenomenon that occurs in December, which is playfully referred to as the “Santa Claus Rally.”

First observed by market historian Yale Hirsch in the 1970s, the Santa Claus Rally is the tendency of equity markets to experience a bump during the final five days of trading in December, and the first two days of trading in January.

According to the Stock Trader’s Almanac, the Santa Claus Rally has historically resulted in an average gain of about 1.3% during those specific seven days. The rally is often attributed to factors such as the conclusion of a flurry of year-end tax-loss harvesting, holiday spending optimism, and reduced trading volumes, which can all lead to a less volatile market environment. However, while Santa Claus Rallies are common, this phenomenon is not a guaranteed yearly event. In fact, when absent, it has on occasion foreshadowed weaker market performance in the following year.

So, with that top of mind, was there a Santa Claus Rally at the end of 2024, and, if so, what was the outcome?

Our analysis revealed that 2024’s “Santa Claus Rally” delivered mixed results. While the first few days of the traditional rally period saw moderate gains in the S&P 500, the final trading days showed signs of hesitation as investors grappled with the Federal Reserve’s policy outlook and mixed economic data.

Which turns our attention to equities.

How did equities perform in December 2024?

The short of it is that December’s equity performance pretty much mirrored the broader trends of 2024. Large-cap growth stocks were standout performers, with companies like Tesla and Nvidia continuing to dominate both headlines and portfolios. More specifically, the technology sector closed the year as the best-performing sector, while consumer discretionary stocks capitalized on robust year-end spending.

And what about the energy sector?

Our research revealed that, due to falling oil prices and reduced demand from China, the energy sector told a different story. But while it indeed struggled through a majority of the month of December, this sector did experience a late rebound in the final trading days as oil prices stabilized.

So, in the aggregate, US equity markets in December ended with above average gains for the year.

And what about market performance abroad?

Cherry picking a few observations internationally, we found that Japanese equities specifically, which were buoyed by accommodative monetary policies and domestic economic reforms, had a comparatively strong month. That is to say that many other developed international equities decreased in December and actually underperformed for all of 2024.

Lastly, still focusing internationally, emerging markets fared better, posting generally higher returns than their developed counterparts (although gains were tempered due to persistent concerns over Chinese economic growth).

How did fixed income perform in December?

As expected, December’s fixed-income market was largely shaped by the Federal Reserve’s monetary policy decisions. Specifically, in its final meeting of the year, the Fed implemented its third consecutive 0.25% rate cut, which lowered the federal funds rate to 4.25%-4.5%. While this marked progress in addressing economic growth concerns, the Fed’s cautious tone for 2025 telegraphed that future rate reductions would likely be limited.

Due to the challenging environment of higher yields and ongoing inflationary pressures, bond markets reacted to the aforementioned events accordingly, with the Bloomberg U.S. Aggregate Bond Index finishing the year modestly. As the year drew to a close, high bond yields exerted downward pressure on bond prices, leaving many fixed income positions in negative territory. This was further compounded by a strong investor preference for risk-on equity assets as investors exited bond positions to seek greater reward as stock market optimism blossomed.

Lastly, high-yield bonds outperformed, returning more for the year as investors sought investments in riskier credit. Consistent with the pattern in 2024, investors we’re hungry for risk-on assets.  

Some year-end macroeconomic highlights for investors:

The fact is that December’s economic data painted a mixed picture:

  • Inflation: Core PCE (personal consumer expenditures) rose just 0.1% in November, the lowest monthly increase since May, signaling that the Fed’s tightening cycle is gradually cooling price pressures.1
  • Growth: The U.S. economy was resilient, with Q3 GDP growth revised upward to 3.1%. Retail sales in November grew by 0.7%, highlighting strong consumer activity due to the holiday season.2
  • Jobs: The labor market remained stable, with unemployment steady at 4.2%. (Weekly jobless claims fell more than expected in the final week of December, underscoring continued labor market tightness.) 3

The mixed economic news aside, the consensus is that challenges persist. For instance, the housing sector remained a weak spot, with new home construction slowing as high mortgage rates weighed down demand. Manufacturing data also reflected ongoing softness, as the ISM Manufacturing PMI stayed below 50 for the 9th consecutive month. (This indicates contraction.)

Looking Ahead to 2025

As the curtain rises upon 2025, investors are once again balancing cautious optimism with macroeconomic uncertainties.

All of this is to say that a closer examination of history can provide us with some valuable lessons for ways to navigate the road ahead. The mixed success of this year’s Santa Claus Rally suggests that while seasonal patterns can offer some guidance, they are frankly never a substitute for careful analysis and diversification.

With these observations in mind, here are the key themes for 2025:

  • Look for a slowing of Federal Reserve rate cuts, with only two reductions expected, which should move the federal funds rate near 3.75% at the close of 2025.
  • There may well be opportunities in international markets, particularly Japan and emerging markets, where structural reforms and fiscal stimulus could drive further gains.
  • We may see continued strength in growth stocks, though, importantly, valuations in some sectors may face headwinds from rising global bond yields.

The equities markets, including the S&P 500 and NASDAQ, are showing signs of nearing overvaluation in the short term. Investors are treading cautiously, awaiting clarity on how potential policies might shape critical factors like inflation, jobs, and corporate earnings. A period of slower growth or sideways market movement this year would be a welcome development, as it allows earnings to catch up with valuations—ensuring that growth remains healthy and sustainable over the long term.

As Dawson wisely pointed out in the video above, “Partying Like It’s 1999” risks creating a market bubble, which could lead to a sharp correction. Historically, after an interest rate-driven downturn like we experienced in 2022, markets often enjoy two robust years of growth, followed by a necessary period of moderation. This cooling phase helps prevent overheating and sets the stage for steady, sustainable growth in the future.

That’s a wrap for 2024 and a kick-off to 2025.  

We encourage you to always remember that long-term strategies are essential, even as investors stay agile to capitalize on short-term opportunities. In summation, whether it is equities benefiting from secular growth trends, fixed income offering yields in a higher-rate environment, or commodities reflecting broader economic shifts, 2025 likely promises another dynamic year for financial markets.

We appreciate your loyalty. So please never hesitate to contact us if you have any questions – or for those readers in the Sacramento region, including Rancho Cordova, Gold River, Fair Oaks, Carmichael, Roseville, Folsom and beyond who are not yet clients and are seeking expert fiduciary financial and retirement planning – we encourage you to reach out to schedule a complimentary consultation.

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