A grim week for equities on both sides of the Atlantic has dashed hopes of a Santa Rally this year.
In stark contrast with Santa Rallies of the past, London’s blue-chip index, the FTSE 100, had dropped 2.6% by Friday in its final full week before the shortened Christmas week.
The scene was by no means pretty across the Atlantic in the meantime, with the Dow Jones off 2.7%, S&P 500 down 2.6% and Nasdaq 2.7% lower.
Historically, the S&P 500 delivered a positive return in the seven trading days around Christmas - five before and two after - in 58 of the 73 years of its existence up to 2022, according to IG Group.
London’s FTSE 100 has ticked up by an average 2.3% over the same period since its inception in 1984.
Needless to say, any scope for a Santa Rally this year would rest heavily on an aggressive upturn before the New Year is welcomed in.
Powell: Aka the Grinch
Unfortunately, the prospect of a seasonal upswing would appear unlikely, and that’s down to the Federal Reserve and de facto Grinch of the year for markets: Jerome Powell.
Wednesday saw the Federal Reserve cut its key interest rate by 25 basis points to a target range of 4.25%-4.50%, bringing reductions to a full per cent since September.
However, with the cut well priced in by the markets, chair Powell and co’s outlook was always going to be key.
Lo and behold, it wasn’t easy reading for traders.
Where the Fed had previously signalled four interest rate cuts though 2025, it now saw just two.
“The verdict was clear: the Fed must slow down,” Swissquote Bank analyst Ipek Ozkardeskaya pointed out.
“The gross domestic product forecasts for this year and the next were revised higher, the unemployment rate lower, and more importantly, the inflation projections were sensibly higher.”
As Powell said himself, the Fed was “at or near a point at which it will be appropriate to slow the pace of further adjustments”.
That’s not to mention Donald Trump’s impending return to the White House and anticipated price-fuelling tariffs promised throughout his election campaign.
In a year that has seen the Dow, S&P 500, Nasdaq and London-based counterpart, the FTSE 100, all notch records, Ozkardeskaya noted the Fed’s hawkish turn had prompted a correction.
“If nothing else, Jerome Powell has at least delivered a much-needed check to some of the bullish complacency seen among investors of late,” IG’s Chris Beauchamp added.
Still hope for Santa Rally?
That said, a “modest bounce” can by no means be written off, Beauchamp continued.
“Short-term oversold conditions, and the indiscriminate nature of the selling across global stocks, could mean a bit of bargain-hunting does take place, which might at least lead to a short-term recovery.”