Ever notice how the stock market seems to have its own holiday traditions? One of them is this quirky thing called the Santa Claus rally – those last five trading days of the year plus the first two of the new one. It’s like the market’s way of deciding who’s been naughty or nice.
This time around, as we wrapped up the period yesterday, the results were pretty split. The Dow Jones Industrial Average put in a respectable performance, climbing about 1.1%. Meanwhile, the broader S&P 500 actually edged lower by a smidge, around 0.1%. Yeah, it’s not a huge move, but in the world of seasonal indicators, these things get watched closely.
A Tale of Two Indices: Why the Divergence Matters
I’ve always found these seasonal patterns fascinating, even if they’re not foolproof predictors. But when one major index gets a gift and the other gets coal, it begs the question: what exactly is going on under the hood?
In my view, this split performance isn’t necessarily a dire warning sign. Instead, it might be telling us something more nuanced about where the market is heading in 2026. Let’s break it down.
First, a Quick Refresher on the Santa Indicator
For those who might not follow these things religiously, the Santa Claus rally was popularized decades ago by market historians. The idea is simple: if stocks rise during this seven-day window, it’s generally bullish for the year ahead. No rally – or worse, a decline – has sometimes preceded rough patches.
History buffs point to years like 2000 and 2008, where the absence of a Santa bounce foreshadowed serious trouble. In 2000, stocks dropped around 4% during the period right before the tech bubble burst. And in 2008, a 2.5% loss came ahead of one of the worst bear markets ever.
But here’s the thing – it’s not always a perfect signal. Last year, for instance, we didn’t really get a classic Santa rally either, yet the market went on to hit multiple record highs throughout the following months. So context matters a lot.
The lack of a rally can be a preliminary indicator of tough times to come.
– Market historian and almanac editor
Why the Dow Outshone the S&P This Time
Perhaps the most interesting aspect this year is the stark contrast between the two benchmarks. The Dow, with its 30 blue-chip companies, has heavier weightings in more traditional, cyclical parts of the economy – think energy, industrials, and financials.
The S&P 500, on the other hand, is market-cap weighted and has been heavily influenced by a handful of massive technology and growth names, particularly those tied to artificial intelligence.
So when the Dow outperforms sharply during a short period like this, it often signals that money is rotating out of the high-flying growth stories and into more economically sensitive areas. In other words, the bull market might be broadening.
That seems to be exactly what played out over the holidays. Standout performers in the Dow included companies in energy and heavy industry. One major oil giant jumped nearly 9%, boosted by geopolitical developments that could open up new reserves. A leading machinery maker wasn’t far behind, gaining close to 6%.
Financial powerhouses and industrial firms also contributed solidly, with gains ranging from 2.5% to over 5%. These aren’t the flashy AI plays that have dominated headlines for the past couple of years.
- Energy stocks surged on hopes of increased global supply access
- Industrial names benefited from expectations of stronger economic activity
- Financials gained amid prospects for continued growth and favorable policy
Market Breadth: The Hidden Story Investors Love
One of the biggest criticisms of the recent bull market has been its narrowness. For much of the past two years, a small group of mega-cap tech stocks carried the load while many other sectors lagged.
But signs of broadening participation are generally healthy for the longevity of a bull run. When more sectors and companies start contributing to gains, it suggests the advance is built on firmer fundamental ground rather than speculation in a few names.
In my experience following markets, these rotation periods can create opportunities for investors who have been waiting on the sidelines for value or cyclical areas to catch up.
Major investment banks seem to share this optimistic take. Analysts at one prominent firm recently noted that accelerating U.S. growth combined with easier monetary policy could drive particular upside in cyclical pockets early in 2026.
Accelerating US economic growth alongside easing monetary policy should drive upside in cyclical pockets of the equity market in early 2026, including stocks exposed to middle income consumers and firms tied to the nonresidential construction cycle.
– Wall Street strategy team
What Could Drive Cyclicals Higher in 2026?
Several factors could support continued strength in these overlooked areas. First, the economy appears to be reaccelerating after a period of slowdown concerns. Manufacturing and construction indicators have started to stabilize or improve.
Second, monetary policy remains accommodative, with central banks likely to continue cutting rates if inflation stays contained. Lower rates tend to benefit cyclical companies more than growth stocks that already trade at premium valuations.
Third, geopolitical developments – like potential resolution in certain oil-producing regions – could keep energy prices supportive without spiking too high.
And finally, fiscal policy and infrastructure spending initiatives could provide tailwinds for industrials and materials companies.
- Reaccelerating economic growth indicators
- Continued supportive monetary policy
- Stable to supportive commodity prices
- Potential infrastructure and manufacturing resurgence
- Attractive relative valuations compared to growth stocks
Risks to Watch: Not Everything Is Festive
Of course, no market discussion would be complete without acknowledging risks. While the broadening thesis looks compelling, there are always potential hurdles.
Valuation remains a concern in some areas. Though cyclicals generally trade at more reasonable multiples than mega-cap tech, certain sectors have run up significantly in recent months.
Geopolitical tensions could flare up unexpectedly, impacting energy prices or global trade. Policy changes following elections can introduce uncertainty.
And let’s not forget that seasonal indicators, while interesting, aren’t infallible. A weak Santa period doesn’t guarantee poor returns ahead, just as a strong one doesn’t ensure smooth sailing.
Perhaps most importantly, if economic growth disappoints or inflation reemerges, the entire rotation trade could unwind quickly.
Positioning for 2026: Practical Thoughts
So what might this all mean for investors heading into the new year? I’ve found that staying flexible is usually the best approach during transitional periods like this.
Maintaining exposure to quality companies across different sectors makes sense. The shift toward cyclicals doesn’t mean abandoning growth entirely – many technology companies still have strong fundamentals.
But adding or increasing weightings in financials, industrials, energy, and materials could provide diversification benefits if the rotation continues.
Paying attention to earnings reports in the coming weeks will be crucial. If cyclical companies start beating expectations while growth names merely meet them, that would reinforce the broadening narrative.
Ultimately, markets tend to climb walls of worry. The fact that we’re even debating whether a tiny 0.1% dip in the S&P during a holiday week matters shows how strong sentiment remains overall.
Whether 2026 brings continued gains across a wider swath of the market or something more challenging, staying informed and diversified seems like the smart play. After all, the market rarely gives us clear gifts wrapped in bows – usually, we have to do a little work to find the opportunities.
Here’s hoping your portfolio gets more than just coal this year.
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