Good morning. Today we’re unpacking what stocks usually do under a new president, a preview of a key jobs report, and the costs of the deadly California fires. First time reading? Join over 190,000 self-directed investors and sign up here.

Why stocks could stumble

History suggests investors could see a prolonged holiday hangover after Santa skipped his annual visit to Wall Street this year. 

Over the last century, the S&P 500 has climbed 79% of the time during the Santa Rally — the last five days of December and first two of January.

This year, however, the index dropped an uncharacteristic 0.53%, which Bank of America strategists see as a bad omen for January and the first half of 2025.

Historically, the S&P 500 closes January lower 52% of the time after missing the Santa Rally. A negative January, in turn, often cascades into weaker six-month returns with an average loss of 0.02%. 

By comparison, the index averages a 4.85% gain in the same stretch when the Santa Rally and January are both positive.

• Positive January → positive full-year 79% of the time, with 13.9% average return

• Negative January → negative full-year 70% of the time, with -3.5% average return

This pattern is particularly notable during the first year of a presidential cycle, when markets tend to underperform with an average annual return of 6.6% — well below the 10% historical average. 

The chart below from Bank of America illustrates how the S&P 500 performs through each of the four years of a presidency.

To be sure, financial markets have already responded unusually well to the re-election of Donald Trump. His emphasis on asset prices, deregulation and business could make any historical data moot. 

That said, it’s possible that fundamentals end up with the final word. Steve Dean, CIO of Compound Planning, cautioned that stocks indeed look expensive relative to history after back-to-back banner years.

If the Magnificent Seven names, for instance, veer from their “priced for perfection” path, downside risks could spread to the entire market in his view.

“Any hints,” Dean said, “that the actual trajectory for sales and earnings that are expected from the AI revolution is even slightly less than the current enthusiastic path would quickly bring share prices back to a reconsidered reality.”

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Elsewhere:

🚒 The California fire ranks among the worst ever. Early estimates for the financial impact of the deadly blaze that’s swept across Los Angeles see damages of up to $57 billion, according to AccuWeather. Homes in the impacted areas of Malibu and Santa Monica have a median value above $2 million, and more destruction is still expected. (Bloomberg)

📊 Economists anticipate weaker job growth. The average estimate for total non-farm payrolls in December is 153,000. If that holds, it would be a significant drop from November’s 227,000 new jobs added, and it’d also be below the 12-month average of 189,500. In the last 5 years, this employment report has fallen short of the median estimate 35% of the time. (FactSet)

🤖 AI is coming for Wall Street jobs. A new report predicts global banks will cut as many as 200,000 jobs over the next three to five years as artificial intelligence becomes more pervasive, mostly among middle-office and operations staffers: “Any jobs involving routine, repetitive tasks are at risk.” (Bloomberg)

Traders see 55% odds that inflation will return back to 4% or higher in 2025, according to Kalshi, the biggest US prediction market:

Rapid-fire:

• Many home insurance companies paused coverage in California or raised premiums sharply after 2017 fires caused huge losses for the industry (Barron’s)

• Fed Governor Bowman said the December rate cut should be the “final step” in the easing process (CNBC)

• One of Nvidia’s VPs sold $5.5 million worth of shares, the first insider stock sale of the year (Barron’s)

• Corporate borrowers have started 2025 with a record $83 billion in dollar bond sales (FT)

• Anthony Pompliano lays out his view on whether asset prices are forming a bubble (Pomp Letter)

• Microsoft will make performance-based layoffs to cut what amounts to less than 1% of the company (CNBC)

• The $28 trillion Treasury market is flashing a warning about the US economy (Opening Bell Daily)

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