- Coiled Spring Capital Macro Report
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- Coiled Spring Capital MR 1/5/24
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The Santa Claus Rally (SCR) failed to deliver on its traditionally bullish reputation, with the SPX ending the seven-day stretch down 0.5%. However, a closer look reveals that Santa favored SMID caps this year, as the Russell Small Cap Index (RTY) posted a solid gain of 1.39% during the same period.
Does a lackluster Santa Claus Rally (SCR) spell doom for the stock market in 2025, as some theories suggest? Not necessarily. While a weak SCR is often seen as a cautionary signal, history tells a more nuanced story. For instance, the SCR failed to materialize last year, yet the SPX still delivered an impressive 23% gain.
But there is some merit to this discussion, as historical data suggests muted returns in both January and the full year when the SCR is not positive. This aligns closely with our outlook for the market in 2025—we anticipate heightened volatility, significant swings, and limited overall progress.
That doesn’t mean our forecast is set in stone. As we’ve emphasized time and again, our objective isn’t to make bold proclamations about where the stock market will land by year’s end. Instead, it’s to define the prevailing trend and guide our readers to stay aligned with it. That said, we believe this outlook will hold. We've provided ample quantitative evidence in past reports pointing to a subpar 2025. Combine this with an expensive stock market trading at 22x forward earnings, and it’s not exactly a stretch to anticipate muted returns.
To recap, here’s a reminder from Carson Research on the historical performance of the presidential cycle. Q1 consistently stands out as the weakest quarter. Layer on the historical tendency for a negative Santa Claus Rally to lead to soft January and Q1 returns, and we should brace ourselves for a year of heightened volatility in 2025.
What is the market's typical behavior in January following a +20% annual gain? According to a study from Schaeffer’s Research, history indicates that January tends to be relatively uneventful. Despite the strong momentum from the prior year, the data suggests a more subdued start, aligning with expectations for a calmer or more cautious market tone.
That said, these are merely historical tendencies, and history also shows that when the market ends the year on a particularly dismal note, a snapback rally in January has occurred in every instance, the caveat being this is a small sample size.
And a similar study from Fundstrat also points to greener pastures for January and beyond.
The bottom line is that we must remain open-minded about whatever outcomes lie ahead. Our approach doesn’t rely on any single indicator or study to shape our views. Instead, we base our analysis on an exhaustive and holistic evaluation of multiple factors, piecing together the market’s mosaic. By using a "weight of the evidence" approach, we focus on price movements and a broad array of variable analytics to guide our decisions.
For those who might dismiss our work as guesswork, we invite you to revisit last week’s report, where we showcased our most notable market calls from 2024. The year prior, we highlighted our exceptional 2023 predictions. Consistently navigating the markets with accuracy across varying cycles, regimes, and timeframes isn’t luck—it’s the result of diligent analysis and a disciplined framework.
Looking ahead, the stock market in 2025 faces three primary headwinds: rising rates and the strengthening $USD, Trump’s policy agenda (including tariffs), and persistent inflation. These challenges are deeply interconnected, and their combined impact will likely shape the market's trajectory in the coming year.
Now let’s dig in.
