Get Your Santa Claus Rally Caps On. Then Prepare for a Comedown.

Santa Claus visited the New York Stock Exchange on Nov. 25. (Spencer Platt / Getty Images)

Inflation is high enough to justify griping at the grocery store, but not high enough that the Federal Reserve won’t cut interest rates on Wednesday —and that should be good enough for the stock market to continue its winning ways through the end of 2025. Next year might be a different story.

The S&P 500 index ended the week up 0.3% at 6870, just 0.3% off its all-time highs. The Dow Jones Industrial Average was up 0.5%, and the Nasdaq Composite rose 0.9%. Even the small-cap Russell 2000, up 0.8%, got in on the act.

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Now there’s only one more door standing between investors and a banner year for the stock market. And the guy standing behind that door—Jerome Powell—doesn’t tend to shock people. In fact, the last time he surprised anyone was when he was spotted at a Grateful Dead concert in 2023. Traders seem more convinced that Dead frontman Jerry Garcia will come back to life than Powell and his colleagues will delay a cut in interest rates. By the end of the week, the odds of a cut were up to 87%.

Absent surprises, the market tends to end the year in a celebratory mood. Since 1950, the last two weeks of December have been the best weeks for stocks on the calendar, averaging a 1.4% return, according to Mark Hackett, chief market strategist at Nationwide. “With sentiment recovering and investors increasingly emboldened by the success of the buy-the-dip approach, bulls clearly have the upper hand into year end,” he wrote.

And even some worrisome signs about the economy shouldn’t upset the market’s momentum into year end, said Scott Wren, senior global market strategist at Wells Fargo Investment Institute. Because of the government shutdown, the last U.S. jobs numbers that were released were from September, but alternate data sources have painted a bleak picture of employment. Payroll company ADP reported on Wednesday that the private sector shed a net 32,000 jobs in November, the largest monthly drop in over two years.

“I talked to a lot of high-net-worth clients this week, and many of them are pretty nervous,” Wren said. “But here we are, close to the record high.”

Next year, however, may not be as rosy. Steve Sosnick, chief strategist at Interactive Brokers, is concerned that a shift in Fed leadership could lead to policy changes that depress stock values. But he doesn’t expect those worrisome signs to show up yet.

“There’s a reason why Wall Street expects and welcomes a ‘Santa Claus Rally’—stocks can move up with little effort, calling to mind the adage ‘don’t short a dull tape,’ ” he wrote in an email. “If the underlying market mood remains positive, it is hard to expect something much different.”

So happy holidays—while it lasts.

Write to Avi Salzman at avi.salzman@barrons.com