The Christmas Rally may have started in the US stock markets. After the FED meeting last week, the stock markets had pulled back. Frankly, I was a little worried, but with the positive inflation data on Friday, the stock markets started to recover again and entered the first day of the Santa Claus Rally period very well on Tuesday. The Santa Claus Rally covers the last five trading days of the year and the first two trading days of the next year, and stocks usually rise during this period, of course they do not always rise. Last year's Santa Claus Rally was a massacre. Stocks fell especially hard in the last 3 days. But this time it seems like we're off to a pretty good start. Since 1950, the S&P 500 has returned an average of 1.3% during this period. However, the average 7-day return for the S&P 500 is 0.3%. In other words, this is a return well above the general environment, and it has already realized a large portion of the 1.3% return on Tuesday. Wall Street's Santa Claus Rally is not only good news for the end of the year, it is also good news for the next year. It is known that the S&P 500 rose by around 10.4% the following year during the Santa Claus rally.
On the other hand, there is actually a more valid correlation, the January barometer. The January barometer says that if January is good, the stock markets will be in an upward trend. The concept of the January barometer was put forward by Yale Hirsch, half of Strock Trader's Almanac, in 1972. I had also focused on this January barometer in January last year. January had started very badly and I was worried about the year. However, the January parameter turned very positive towards the end of January. We had a very good year after that. Since 1945, when there was a strong rally in January, the S&P 500 completed the year with an average increase of 18.3%. Remember, we are completing this year with a 26% increase, and we still have a few more days to go. If the increase continues, we will reach even higher levels.
On the other hand, if January does not go as expected, the annual average return could be negative 1.9%. So we will be following both the Christmas rally and its performance in January closely. The S&P 500 has had an exceptionally good 2024 by the way. It rose by around 26% over 25% and did not see a correction of more than 10%. The sharpest correction was the correction that came from this Japanese carry trade on August 5th, and it easily overcame that. Another interesting point is that the S&P 500 remained above the 200-day moving average all year. This is not a very common thing. When we look at it since 1952, the number of times the S&P 500 has remained above the 200-day moving average is only 12 years. So when we look at it like this, the S&P has shown a tremendous performance. Please tell those who shorted the S&P 500 this year.
On the other hand, this may be a bit worrying for next year. Because some analysts say that when the S&P 500 finishes the year so strongly, next year's earnings expectations may drop a little. The S&P 500 has an average of 9.2% gain. In such years, it drops to 4.6%. In other words, the previous year's strength has a slightly negative effect on the next year. It's quite normal, we'll talk about it later. I also see that many stocks are very inflated, I'm a little worried. Therefore, it seems quite reasonable for the stock market to slow down a little more next year. We started this year's Christmas rally tremendously. The Dow Jones rose by 0.9% and returned to the 50-day moving average. The Dow Jones had fallen for a while. As you know, the S&P 500 rose by 1.1%. In other words, it has already gained a significant portion of the Santa Claus rally with an average of 1.3%, and in this rise, it has risen above both the 21-day moving average and the 6000 level. The Nasdaq composite index rose 1.35% and recorded its third strong session as it re-approached record levels. I honestly did not expect the first day of the Santa Claus rally to start so strongly. Because we are coming off a very good year and such power again means that the pullback experienced last Wednesday brought investors back into the stock market.
Another good news was the decline of the volatility index VIX on Tuesday. It had reached a 4-month peak on Wednesday last week, reaching 28. It started to fall rapidly from there. Those who shorted it made good money. It has now fallen to an optimistic level again. On the other hand, there is also bad news. The first of these is that 10-year treasury bond yields are very high in America. It rose to 4.63% at one point on Tuesday. Then it fell from there and closed the day at 4.58%. This is not good, because high interest rates mean, firstly, that investors are provided with an alternative investment area other than stocks, which is not very nice in this respect. The second unpleasant aspect is, as you know, especially in the valuation of technology companies, there is the cash flow they will create in the future. A discount rate is used when pulling them back, that rate is dependent on interest rates, and when the 10-year treasury bond yield is this high, that rate increases. This also puts pressure on stock values, but so far the markets have not paid much attention to this. On Tuesday, DXY also broke a record, the DXY index approached 108. But the stock market doesn't care about this right now.
Normally, high bond yields and a high dollar have a negative effect on American stocks. The stock market doesn't care for now. Because it has come with such gains that I think so far it's a bit of a fomo, fear of missing out, oh I'm out of this business, investors are rushing to the market and saying that if you invest in the right stock or the right ETF, the stock market is currently bringing 5% in a day. It doesn't care about the annual 5% return, at least that's how I interpret it, but of course these can change. Because the stock market probably won't perform like this year in 2025. There is a 24% return in 2023 and a 26% return in 2024. In other words, these are not returns that will always continue like this. The numbers I've been giving so far also indicate that the rise may be a little slower next year. In fact, I'm a little worried about the first half of the year. In this context, if the index suddenly flattens, interest may become valuable again. Because right now, people don't really care about interest rates because the index is rising rapidly. But it is really surprising that real interest rates are still rising, especially in an environment where the FED continues to lower interest rates.
Tesla had a strange day on Tuesday, it increased by around 7.5%, and rose above 462. It had reached a record of 488.54 before the sharp decline last Wednesday. It is approaching there again. There is actually no new news about Tesla. China sales are going positively. European sales are going quite badly. American sales are going somewhere close to average. In other words, the issue is not about car sales, but about autonomous driving, the robot project and Elon Musk's relationship with Trump. But the strong momentum of the stock continued to carry it seriously upwards yesterday.
Apart from that, Nvidia also continued to rise on Tuesday. It increased by 10% since Wednesday last week. In fact, we can say that the entire chip industry was positive. I am one of those who still think that chips will do well next year. Because there is still a long way to go in artificial intelligence. All of this is good, but there is a very important issue. Stocks are now quite expensive in America. In other words, you know, I was a super bull in 2023 and 2024. Because I found stocks cheap and I thought America could overcome the inflation problem without going into recession. Right now, the inflation problem seems to be coming back slightly, but it is not very serious, there is no recession on the horizon, at least for now. I do not think that a recession will come during the term of a president like Trump, who relaxes the regulations that the market loves and does everything for the markets. All of these are positive, in that respect I am more positive for 2025 and especially 2026, I am very positive. But none of these change the fact that stocks are quite expensive right now.
There is a table published by hulbert ratings that I came across on Marketwatch.com. The table is really eye-opening, it shows us that American stocks are approaching historical highs. In the percentile since section on the right, as you approach 100% in the 2000 - 1970 - 1950 columns, you should understand that this is a sign of the beginning of a bear market. There is a price divided by earnings ratio for the last 12 months, 28.32 right now. It was a little higher at the beginning of the month, it was 25.09 at the beginning of the year. This has increased considerably and the probabilities increase the probability of entering a bear market here. Of course, when we look at the average of the 2000s, the probability of entering a bear market is a little less, you see that here. But it is still quite high, the reason for this is that most of the companies in the S&P 500 index have transformed into technology companies since the beginning of the 2000s. Their price-earnings averages are already high. That is why he gave an 82% probability here, but when we compare it to the S&P 500 averages of previous years, the situation seems quite bad.
Price divided by earnings next 12 months, in other words, when we look at the next 12 months, it is currently 23.66, at the beginning of the year it was 21.68. 2.66 is a very high ratio and with a 99% probability, even compared to the 2000 averages of the S&P 500, this could lead to a decline, it is an indicator of a bear market, the table says. CAPE ratio, here we look at the seasonally adjusted price-earnings ratio, it is 37.35, it was 32.37 at the beginning of the year. It is very likely that we are entering a bear market again, this is expensive, the table says. Dividend yields were 1.24, 1.47 at the beginning of the year, in other words, the stock value of companies is growing much faster than the dividends they distribute. Again, there is this bear season entry indicator.
Price divided by sales, price divided by book value, q ratio, in all these, we have a very expensive stock market and this table almost predicts an entry into a bear market with a 100% probability. The Buffett ratio, or the idea put forward by Warren Buffett, is the total market value of companies divided by the gross national product of the United States, 2.02, currently, at the beginning of the year it was 1.73, again a bear market indicator. Average household equity allocation is very important, it shows how much of the total wealth of American citizens is allocated to stocks. It was 48.3% at the beginning of the year, currently 51.8%, and it was the same last month. Since this means that American citizens no longer have money to allocate for this, it is again a bear market indicator. When we look at the ratio of the S&P 500 to the M2 money supply, the ratio is also distorted there. Of course, these numbers can change, especially if companies bring very good balance sheets, these ratios will automatically decline. But unless really very strong balance sheets come, these ratios show that the markets are a little inflated.
By the way, it is useful to state that we are not yet in a complete bubble phase. Because for example, there are times in history when the S&P 500 Next 12 Months has seen 28. But you should definitely keep in mind that we are at a very high level and that we have priced in many stocks perfectly. This already makes me a little nervous, especially for the first half of 2025. My views on the second half are much more positive. Because I think Trump and Elon Musk will take America to a better place together. But if the Christmas Rally continues at the same pace it started, we will enter 2025 with even higher values. Of course, this is not good news for Trump either. It is useful to mention that. Because Trump wants the stock market to rise a lot during his term, but they are already entering the stock market very valuable. Here, I expect Trump to say something that will pull the stock markets down a little before he is elected, so that he can say where they rose from during my term.
I think a decline will come to the stock markets. Of course, it is not possible to be sure of this, but I would like to state that next year will not be as easy as 2023 and 2024 and that I did not enter 2025 as bullishly as I did in 2023-2024. I am worried about the first half of 2025, I see the second half better. Of course, these are very long-term predictions, I could be wrong. In the meantime, there may be a serious fomo in the market. In other words, people may say where are the papers going, we should enter too. But I would be scared if stocks increased after these ratios. Although it is still positive for 2025, it is certain that a correction is needed. I want a 10% correction in the S&P 500 so that the stock market becomes reasonable again and new buyers enter the market. Of course, stock markets can remain irrational for a long time and continue to rise. It is difficult to see this, but somewhere these numbers need to become a little more reasonable. Because if you have chosen the right companies in the 2025 balance sheets, it is possible for company balance sheets to strengthen. But I don't expect a wave that will push the balance sheets of all companies in America super high, at least in the first half of the year.
As Trump's policies come into effect, I think the balance sheets will be more positive starting from the second half of the year. In this context, choosing the right stocks becomes incredibly important. The entire index has been going up for two years, it may not be the same this year. I think the index may go up more slowly in the first half of the year, or it may even decline a little. In this context, choosing the right stocks becomes very important. We need stocks that will fill this high valuation. On the other hand, we also need to play defense well. We have always played offense for two years, there was very little defense in my portfolio. Now I am also thinking of playing defense more. I am trying to strengthen my defense with my cash, the hedge positions I have taken and some stock choices. We did very well, 2023 - 2024 were tremendous. I don't want to give these gains back in 2025.
On the other hand, it is difficult to time the markets. Markets can go up even more crazily, we can also experience a fomo phase. This is also possible. We can exceed the ratios we just saw. But these always seem like opportunities to sell or even short the market a little bit. If you ask what I want, let's experience this correction and let the market come to its senses or at least go flat for a while and let the company balance sheets fill this valuation during this flat trend. Then let's get down to business. But sometimes the market may not think the way I think. I am always open to all kinds of market changes. In this context, I say I hope 2025 and 2026 will be good for everyone. This is how the Santa Claus rally started. As of Wednesday, the stock markets are completely closed. They were open for half a day on Tuesday anyway. I hope we make a good start to 2025 and I hope I am wrong and the markets never lose their upward trend. But unfortunately, this is a bit against the nature of things.
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