The Dow Jones Industrial Average entered December hoping for a “Santa Claus rally” to offset an already challenging month, but Wall Street’s seasonal cheer failed to materialize for the second consecutive year.
By the end of December, the Dow had dropped about 5.3%, its worst monthly performance since September 2022 and its weakest December since 2018, according to Dow Jones Market Data. In contrast, the S&P 500 declined a more modest 2.5%, while the tech-heavy Nasdaq Composite managed a 0.5% gain, leaving the Dow lagging behind.
A Rally That Lost Steam
December’s struggles followed a strong post-Election Day rally, which had pushed the Dow above the 45,000 mark for the first time on December 4. “We’ve had a pretty tremendous run-up,” said Charlie Ripley, senior investment strategist at Allianz Investment Management, noting that the rally may have set the stage for a natural pullback.
Despite initial gains, the Dow began slipping in early December. While the S&P 500 held relatively steady and the Nasdaq continued climbing, all three indexes tumbled on December 18 after a Federal Reserve meeting.
Although the Fed announced another rate cut, Chair Jerome Powell’s comments dampened market sentiment. He projected only two 25-basis-point rate cuts in 2025 and emphasized that inflation could remain sticky, which displeased investors.
“We got that negative shock from Powell,” said Steve Sosnick, chief strategist at Interactive Brokers. Even though Powell’s remarks were largely in line with expectations, they were more hawkish than hoped by the market’s most bullish participants.
Thin Holiday Trading and Exaggerated Moves
The negative sentiment spilled into the typically low-volume holiday trading period, exacerbating stock movements. Historically, the holiday season is favorable for stocks, but thinner liquidity this year amplified declines.
“If people are taking some chips off the table, you tend to see these moves a little bit more exaggerated,” Ripley explained.
Why Did the Dow Suffer More?
The Dow’s underperformance stemmed largely from its structure and composition. Unlike the market-cap-weighted S&P 500 and Nasdaq Composite, the Dow is a price-weighted index, meaning higher-priced stocks exert more influence.
This dynamic played out in December, as gains in Apple (+4%) had less impact than losses in Microsoft (-2%). Meanwhile, standout performances from tech giants like Alphabet (+10%) and Tesla (+16%), neither of which are in the Dow, drove the Nasdaq higher.
“Tech is driving the bus,” Sosnick said. “Tech wins, the markets go up. Tech loses, the markets fall. And the Dow is not a tech-based index.”
The Dow also faced idiosyncratic risks. UnitedHealth Group, a high-priced stock and the index’s second-largest component, struggled after the sudden death of its CEO, Brian Thompson, on December 4. Other blue-chip stocks, including Caterpillar, Home Depot, and Sherwin-Williams, posted significant declines.
A Mixed Bag for 2024
Despite its December slump, the Dow ended 2024 with a 12.9% gain and has climbed 28.4% over the past two years. However, this performance pales compared to the S&P 500’s 53.2% and the Nasdaq’s 84.5% over the same period.
The Dow’s uneven December underscores the importance of viewing it as just one measure of market performance. As Ripley noted, “There may be months when the Dow is out of sync with the other indexes.” For investors, diversification remains key in navigating such disparities.
