Introduction
Equity markets have historically tended to strengthen towards the end of the calendar year, a pattern commonly known as the Santa Claus Rally. While often treated as a market curiosity, the pattern has persisted across decades and cycles.
In 2025, however, the year-end rally is unfolding under a more consequential macroeconomic backdrop. The Federal Reserve has begun easing policy even as the S&P 500 trades near record highs, a combination that has appeared infrequently in modern market history. The interaction between seasonal market behaviour and accommodative monetary policy is worth a closer look.
The Santa Claus Rally
The Santa Claus Rally is conventionally defined as equity market performance during the final five trading days of December and the first two trading days of January. Historical data support its relevance. Since 1980, the S&P 500 has posted gains in approximately 73% of such periods, with average returns of roughly 1.1%. Longer-term datasets extending back to the mid-20th century show similarly consistent outcomes, suggesting the pattern is well-established rather than incidental.
Several structural and behavioural explanations have been proposed. Reduced trading volumes during the holiday period tend to dampen volatility, while the conclusion of tax-loss selling can remove downward pressure on prices. Portfolio rebalancing and year-end positioning by institutional investors may also contribute. While none of these factors alone explain the phenomenon, together they have produced a recurring seasonal effect that markets continue to monitor.
Also Read– What Is Santa Rally?
Rate Cuts Near Market Highs
Interest rate cuts are more commonly associated with slowing growth or rising recession risk. In such environments, equity market performance can be mixed. However, history shows that rate cuts implemented while markets remain near all-time highs tend to carry different implications. In these instances, easing is typically driven by cooling inflation or a shift toward neutral policy rather than economic stress.
Analysis highlighted by Carson Group research indicates that across more than twenty historical instances in which the Federal Reserve cut rates while the S&P 500 traded within proximity to its record high, the index was higher twelve months later in every case, with average gains in the low-to-mid teens. Broader market studies have reached similar conclusions, showing a high probability of continued equity appreciation when easing occurs outside a recessionary context.
The 2025 Market Setting
The current market environment reflects many of these supportive conditions. Inflation has continued to trend lower from post-pandemic peaks, corporate earnings have remained resilient, and financial conditions have eased following the Fed’s December rate cut, which brought the policy rate into the 3.5 to 3.75% range. Equity markets responded by remaining near record levels as investors reassessed forward growth and liquidity conditions.
The timing is notable. When easing occurs immediately ahead of the Santa Claus Rally window, it can strengthen seasonal dynamics by improving liquidity and compressing yields across fixed income. As bond returns decline, equities become comparatively more attractive, particularly for investors seeking growth exposure into the new year.
The Indian Investor Perspective
For Indian investors, these dynamics are increasingly relevant as access to global markets becomes more efficient. Participation in U.S. equities is no longer constrained by large minimum investments or high transaction friction. Platforms such as Appreciate allow investors to access U.S. stocks and ETFs through ₹1 fractional investing, enabling incremental allocation rather than lump-sum exposure.
Structural costs matter just as much. Zero remittance charges, low brokerage, and specially negotiated foreign-exchange rates help reduce the long-term impact of currency conversion and transaction fees. Alongside the year-end rally, Appreciate is also running a limited Santa Rally contest, where users who trade on the online platform between December 23 and January 2 can stand a chance to earn rewards worth up to ₹20,000, subject to applicable terms and conditions.
Why Monetary Easing Can Reinforce Seasonal Strength
Lower interest rates reduce borrowing costs, support valuations, and make risk assets more attractive. When easing occurs without a sharp slowdown in growth, investor confidence typically improves. As policy shifts from restrictive toward neutral, market conditions tend to become more supportive rather than disruptive.
In the context of year-end seasonality, easing can amplify positive sentiment by reinforcing expectations of policy support into the following year. This can broaden participation and sustain momentum beyond the seasonal window itself.
Conclusion
The convergence of year-end seasonality and the Federal Reserve easing the rates near market highs represents an uncommon alignment in market history. While outcomes are never guaranteed, past cycles suggest that such conditions have historically been supportive of equities. For Indian investors navigating global markets, understanding how seasonal behaviour interacts with monetary policy can provide a useful perspective as 2025 draws to a close and attention shifts toward the year ahead.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
