Fed's December Rate Cut Almost Certain, But Santa Claus Rally Unlikely

Investors are eyeing a "Santa Claus Rally" as the year 2025 draws to a close, though the Federal Reserve's December FOMC meeting will likely dictate Wall Street's direction. This rally historically refers to U.S. stock performance between the day after Christmas and the first two trading days of January, typically showing gains; some also use it to describe December's overall market rise.

However, whether a Santa Claus Rally will materialize this year remains uncertain, with the Fed's December FOMC meeting potentially determining the market's trajectory.

According to CME's FedWatch, the market currently anticipates an 87.4% probability of a Fed rate cut in December, an expectation that stood at a high 86.4% just a week prior.

Recently, economic data released following the end of the U.S. government shutdown has provided support for rate cut expectations. The latest September Personal Consumption Expenditures (PCE) data showed stable inflation with no deterioration. Dave Grecsek, Managing Director of Investment Strategy and Research at Aspiriant, noted that labor market figures have also fueled the Federal Reserve's prospects for a December rate cut.

Driven by these rate cut expectations, all three major U.S. stock indices rose collectively over the past week. However, the continuation of Wall Street's rally and the actualization of a Santa Claus Rally may not hinge on the Fed's December interest rate decision itself.

Even if the Fed announces a December rate cut, any skepticism from Chair Powell regarding 2026 cuts during his press conference could instantly douse equity's upward momentum.

Grecsek elaborated that the market has already priced in a December rate cut; the true catalyst for further market gains and a Santa Claus Rally lies in the expectations for 2026 rate reductions.

Currently, the Federal Reserve has not made explicit statements regarding the pace of 2026 rate cuts, leaving the market uncertain about the sustainability of the equity rally. In addition to the December rate decision, the Fed will also release its final Summary of Economic Projections (SEP) for the year, which includes forecasts for future unemployment, inflation, and interest rates.

Bret Kenwell, a U.S. Investment Analyst at eToro, stated that the Fed's projections for the 2026 economic and policy outlook are critical, as they will set the market's tone and determine whether a Santa Claus Rally materializes by month-end.

Furthermore, Amy Wu Silverman, Head of Derivatives Strategy at RBC Capital Markets, pointed out another reason why a Santa Claus Rally might not unfold as usual this year: monthly stock market performance throughout the year has deviated from seasonal patterns. Coupled with significant U.S. equity volatility in recent weeks, the upward trend for December appears less clear compared to previous years.

Beyond the December 9-10 Federal Reserve meeting, the market is also monitoring potential changes in the Fed Chair's position. Former President Trump previously indicated he might soon appoint a more "dovish" new chair. Any new information supporting market expectations for a more dovish appointee could also propel U.S. equities higher.

On the data front, investors should watch for the October Job Openings and Labor Turnover Survey (JOLTS) data, due December 9, and initial jobless claims, set for release on December 11.