The historical record of the stock market shows that in most cases, there is a rebound of 'Santa Claus', which gives investors hope. In 2024, the boom of artificial intelligence helped stocks enter one of the best years of the new millennium, but last week, the Federal Reserve took a tough stance on interest rates, causing the index to plummet and hindering market development. This makes many investors wonder if some Santa Claus magic can erase the sell-off and open a new chapter for a better year.

According to a recent statement from Bank of America, the second half of December is usually the second strongest period for the US stock market this year. The market will close at 1pm on Tuesday due to Christmas Eve, then reopen on Thursday and close again on New Year's Day, which often brings sluggish trading activity during holidays.

Paul Hickey, co-founder of Bespoke Investment Group, recently stated that despite this, funds often flow into the market as people invest in bonuses and trade to minimize taxes.

He said that there is less company news, so the relatively stable valuation of the company is also helpful. According to recent analysis by brokerage firm LPL Financial, this helps explain why December has been the second best performing month for the S&P 500 index since 1950 (after November).

The consistency of these holiday gatherings is also shocking. Since 1950, Standard&Poor's has risen 74% per LPL in December, better than any other month. According to Bank of America, this number rose to 83% in presidential election years. These profits are often returned, so Kris Kringle is mentioned.

LPL's George Smith wrote, "In the first half of December, stocks averaged flat or even depreciated, and then rebounded on average in the second half (the upward momentum was established around the 11th trading day of this month)

Any holiday gathering can bring trouble

However, when Santa Claus arrives, it heralds a difficult time ahead. The market decline during the typical holiday rebound in 1999 and 2007 was the precursor of the Internet foam and the financial crisis in 2008, respectively.

However, the small sell-off around New Year's Day last year was not a precursor to future events. Despite a decline of about 1.5% this month, the S&P index rose by 25% in 2024 and is currently expected to become the fifth best year since 2000. As of Monday noon, the index rose slightly, approaching the threshold of $5950.

Last Sunday, Bank of America stated that the final meeting of the Federal Open Market Committee in 2024 may be the "last hurdle" for Santa Claus' rebound - an obstacle that the market has not cleared. However, the note also mentions that since the outbreak of the pandemic, the cost of using S&P 500 index options to hedge against year-end rebounds has not been cheap.

Gonzalo Asis, Stephen Juneau, and Ohsung Kwon from Bank of America pointed out, "Therefore, we like SPY's year-end upward hedging, either (i) replacing and locking in some equity returns, or (ii) increasing the overall technology risk exposure to those who may have already started rotation

However, retail traders should be aware that a decrease in trading volume during holidays may bring greater risks. As investors attempt to expand or exit their positions, prices may fluctuate faster and more violently.