Market Analysis

Will Santa Show Up This Year?

Dec 2, 2025

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Seasonality, the Fed, and What December 2025 Could Mean for Markets

Executive Summary

December is traditionally one of the strongest months for equities, with the so-called “Santa Claus rally” the final days of December and the first sessions of January often delivering positive returns.

In 2025, however, the usual seasonal tailwind is colliding with an unusually uncertain macro backdrop:

A year marked by AI-driven volatility, trade headlines, and a historic U.S. government shutdown.
An upcoming Federal Reserve meeting (Dec 9–10) where markets are heavily pricing another rate cut, but policymakers are visibly divided.

The result is a December where seasonality is supportive, but policy risk is dominant. Any year-end rally will likely be shaped as much by the Fed’s decision and communication as by historical patterns.

1. What Is the “Santa Rally” and Why It Matters

The Santa Claus rally refers to the tendency for equities to perform well over:

The last five trading days of December and the first two trading days of January.

Historically, this 7-session window has:

Delivered above-average returns versus a typical week.
Produced positive performance more often than not, as year-end flows, lower liquidity and improved sentiment combine to support risk assets.

More broadly, December has tended to be one of the stronger months of the year for major indices like the S&P 500 and key European benchmarks. Typical drivers include:

Year-end rebalancing and “window dressing” by institutional investors.
Bonus and contribution flows beginning to enter the system.
Lower macro and corporate newsflow, reducing the frequency of negative surprises.
A constructive sentiment bias, as investors look ahead to the new year.

For allocators and traders, this does not guarantee a rally, but it provides a statistical bias: all else equal, the path of least resistance in late December has historically been higher.

2. Why 2025 Is Not a “Normal” Santa Setup

Seasonality Not Working

Typical patterns failed this year, with normally calm periods hit by sharp rotations and drawdowns.

AI as Both Engine and Risk

AI-led mega-cap concentration boosted markets early on, but DeepSeek volatility and valuation concerns now amplify every move.

Policy Noise

Surprise tariffs and a long government shutdown disrupted data flow and complicated the Fed’s policy assessment.

Volatility Back Late in the Year

Indices are struggling to extend gains, and weakness in Bitcoin and other risk proxies shows softer risk appetite.

3. The December Fed Meeting: Rates, Probabilities, and Narratives

Policy Level and Market Pricing

After cutting rates in September and October, the Federal Reserve’s policy rate currently sits in a range around 3.75–4.00%. Futures and options markets now imply a high probability roughly 80–90% of another 25 bp cut at the Dec 9–10 FOMC meeting.

That shift in expectations has been driven by:

Weaker activity data, particularly in manufacturing, with surveys showing contraction and softer new orders.
Mounting evidence of labor market cooling, though not yet a classic recessionary picture.
Public comments from key Fed officials signaling openness to a December cut if the data remain soft.

As a result, markets increasingly see December as:

One more “insurance” cut, followed by a potential pause while the Fed reassesses the trajectory into 2026.

A Divided Committee

What makes this meeting more complex than a typical year-end decision is the degree of internal disagreement:

Several regional Fed presidents and more hawkish policymakers have expressed skepticism about further cuts, citing still-elevated inflation and the risk of easing too quickly.
A core group of governors, by contrast, appears more focused on the risk to employment and growth, arguing that a gradual easing cycle is appropriate.

This raises the likelihood of:

Multiple dissents on the December decision, regardless of whether the Fed ultimately cuts or holds.
A less unified message from the FOMC, complicating markets’ ability to price the path of policy into 2026.

Financial markets tend to respond more confidently when the Fed’s message is clear and aligned. A visibly split committee, especially in a politically sensitive environment, usually commands a higher risk premium in rates and risk assets.

4. Market Implications: Santa Rally vs. Fed Shock

Scenario 1 — Fed Cuts Cleanly (Aligned Committee)

Lower yields → softer USD → improved liquidity →
Supports a Santa rally, especially in tech and growth sectors.

Scenario 2 — Fed Cuts but With Heavy Dissents

Policy uncertainty ↑ → volatility stays elevated →
Choppy or short-lived rally, intraday swings dominate.

Scenario 3 — Fed Holds Rates (Hawkish Surprise)

Yields jump → USD strengthens → financial conditions tighten →
Seasonality overridden, equities risk a year-end pullback.

Conclusion

December has historically been kind to equity investors, and the Santa rally remains a real, if modest, statistical pattern. But 2025 is not a typical year: AI-driven concentration, a delayed data cycle after the government shutdown, and a visibly divided Federal Reserve make this year’s final trading weeks more about policy interpretation than calendar effects.

For now, markets are positioned for a December rate cut and a controlled easing path into 2026. If the Fed delivers that with a coherent message, seasonality may once again assert itself and help lift markets into year-end. If not, investors should be prepared for a December where Santa shares the spotlight—with volatility.

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