The $1.8 Trillion Market Dip Sets Up the Santa Rally
The Santa Rally is still in play...
Before we get started, I wanted to let you know the new episode of my podcast Room to Run is live on Spotify and Apple Podcasts.
In this week’s episode we discussed:
My reaction to Wednesday’s Federal Reserve announcement
Review my portfolio changes in light of last week’s pullback
Updates on what investors should do with struggling value stocks
Preview of next week’s market moving events
Each 10-minute episode can be listened to for FREE on Spotify and Apple Podcasts. If you enjoy the podcast, please leave a review.
Is this truly the most wonderful time of the year for investors?
Markets threw a tantrum last Wednesday after the Federal Reserve signaled fewer interest rate cuts in 2025 than investors had hoped, citing a resilient U.S. economy and mild inflationary pressures. The S&P 500 tumbled 3% as traders digested the Fed’s updated “dot plot,” which now forecasts just two rate cuts next year instead of three.
Like an irritable teenager who didn’t get their Christmas wish, the market reacted with frustration. But here’s the thing about tantrums—they’re short-lived. Despite Wednesday’s $1.8 trillion sell-off and one of the biggest spikes in the CBOE Volatility Index (VIX) in recent history, I haven’t lost my holiday cheer.
In fact, I think the Santa Rally is on its way. This is the same setup that delivered our TikStocks Portfolio members a swift +20% gain during this three-week period last year.
Now is the time to prepare your portfolio to make the most of it.
Santa Claus is Coming to Town
The "Santa Rally" refers to the historical tendency for S&P 500 to rise during the last five trading days of December and the first two trading days of January. It's one of the most reliable patterns I've seen in my 15-year career, and there's plenty of data to back it up.
Since 1950, the S&P 500 has posted positive returns during this seven-day stretch nearly 80% of the time. The average gain over this period? Roughly 1.3%, far outpacing the typical weekly return for the index.
For context, if every week delivered that level of performance, it would translate to over 67% annualized returns—a staggering figure compared to the historical average of 8-10%.
While there's no single explanation for why this happens, several factors consistently contribute to this phenomenon.
A Primer on the Santa Rally
Several factors consistently contribute to the Santa Rally’s seasonal magic, creating a perfect storm for upward momentum in the market.
One key driver is the end of tax-loss harvesting. Throughout December, investors sell underperforming stocks to lock in losses that offset taxable gains. But as this selling pressure eases toward the end of the month, the market stabilizes, and buyers quickly step in, reversing the downward trend.
Another important factor is the reduced trading volumes during the holidays. With many institutional traders on vacation, fewer participants mean less resistance to upward price movements. This creates an environment where smaller waves of buying can drive outsized gains.
The holidays also bring a unique emotional lift to the markets. Optimism around the new year, fueled by celebrations and a collective sense of renewal, often encourages investors to put more money to work. Adding to this, retail investors frequently deploy year-end bonuses into stocks, injecting fresh liquidity just as demand begins to climb.
Then there’s the phenomenon known as “window dressing.” As the year closes, fund managers often buy high-performing stocks to make their portfolios look better to investors. This strategic repositioning adds another layer of upward pressure, particularly on market leaders.
Combined, these dynamics create a powerful recipe for the Santa Rally—a short but reliable burst of year-end gains that savvy investors can take advantage of.
How to Take Advantage of the Santa Rally
Positioning for the Santa Rally can be straightforward yet strategic.
One of the simplest ways to participate is by gaining broad market exposure through ETFs that track the S&P 500, such as the SPDR S&P 500 ETF (SPY). As we’ve talked about before, this is one of my largest portfolio positions (and should be yours too).
For those seeking higher returns, small-cap stocks often shine during periods of heightened optimism and falling interest rates. These stocks are more sensitive to improving investor sentiment, and an ETF like the iShares Russell 2000 ETF (IWM) offers access to a diverse basket of small-cap companies ready to benefit from the rally.
High-quality tech stocks can also see significant gains during the Santa Rally. While you could be the Invesco QQQ Trust (QQQ), you could also hold individual stocks (you can see which ones I’m holding here).
And for the more adventurous, risk-on assets like Bitcoin (BTC) can deliver outsized returns.
A Strong Finish to the Year
While holiday cheer and twinkly lights are great, there’s no better way to cap off the year than with a Santa Rally in your portfolio.
And considering the TikStocks Portfolio is already up 55% this year - crushing the S&P 500 return of 25% - I’m happy to add some more gains before the ball drops in Time Square next week.
Now there's no guarantee we see a Santa Rally. But the markets look primed, and history is on our side.
And my portfolio is positioned to profit.
Stay safe out there,
Robert