Stock Market Outlook: December 2024

The rise of prediction markets

In our preelection issue last month, we noted that prediction markets such as Polymarket, PredictIt and Interactive Brokers ForecastTrader expected Donald Trump to win, despite election models and poll aggregators showing a virtual coin toss.

Now we know: The prediction markets were right.

Last month’s election outcome could be a turning point for these platforms, some of which have been operating in a legal gray area. A Trump presidency may result in a more lax regulatory environment going forward.

What are prediction markets?

Prediction markets are online platforms where people can bet on future events.

These events can involve elections, financial markets (for example, whether or not the S&P 500 index will close above a specific level by year end), or even pop culture (for example, which film will win the Academy Award for best picture). They just have to involve binary, “yes or no” or “one or the other” questions that will be resolved by a specific date.

Prediction markets run on a type of financial instrument known as an event contract. An event contract has a nominal value — often $1 — and traders can buy “yes” or “no” positions on it for some fraction of that value. When the event happens, the contract pays out to whoever was right.

For example, imagine an event contract on whether or not the S&P 500 will close above 7,000 points by the end of 2024. If a trader buys “yes” positions on 1,000 contracts for 25 cents each, and then the index does close above that level for the year, the trader would earn $1 per contract, quadrupling their money — a return of $1,000 on an initial investment of $250. But if the trader were wrong, they’d get nothing and would lose their $250.

There are four major prediction markets currently operating in the U.S.: Kalshi, PredictIt, Interactive Brokers ForecastTrader and Robinhood Event Contracts.

Fees, minimums and structures vary. Some platforms charge as little as $.01 per contract, while others take a cut of profits. The range of contracts available on each platform also varies widely. Robinhood's platform just launched and has not added offerings beyond the election outcome, though it says it will soon.

Are prediction markets legal?

The legal status of prediction markets is complicated, but regulators seem to be getting more relaxed about them over time.

Historically, regulators have generally taken a firm stance against unlicensed online betting platforms — especially those that allow election betting. In 2022, the Commodity Futures Trading Commission (CFTC) prohibited Polymarket from taking bets in the U.S.

However, things have changed in the last two years. While the CFTC has attempted to enforce similar bans against PredictIt and Kalshi, PredictIt won its case in July 2023.

The CFTC’s case against Kalshi is ongoing. However, an October 2024 injunction that allowed it to continue operating while the case was decided was widely interpreted as a legal green light for prediction markets, including election-related prediction markets. In the weeks after that ruling, Robinhood launched an election betting market, and Interactive Brokers added election contracts to its trading platform.

Trump campaigned on loosening business regulations, including in the financial sector — and there are already some indications that the incoming administration (and Congress) will be more lenient in its regulation of prediction markets.

On Nov. 14, the Judiciary Committee of the Republican-majority House of Representatives published an open letter demanding that the CFTC cease its legal action against Kalshi and suggested the incoming administration is not interested in pursuing the case further ^[0]

The risks of betting in prediction markets

Part of the CFTC’s legal argument against Kalshi is that its markets constitute a form of gambling. Even if that argument doesn’t ultimately win in court, investors should consider it when deciding whether or not to put money into prediction markets.

Event contracts are short-term, everything-or-nothing bets based on uncertain future events. That makes them riskier than most other types of investments and generally unsuitable for building wealth over the long term — much like sports betting, which we wrote about in our September issue.

Gambling can be addictive — and prediction markets may provide a new medium for that addiction. If you feel that you may have a gambling problem, the National Council on Problem Gambling offers a phone helpline at 1-800-GAMBLER.

But if you’re already on track to meet your financial goals and you have extra money that you’d like to play with in prediction markets, there are a few common-sense guidelines worth following:

• Don’t bet money that you can’t afford to lose.

• Limit betting to special occasions; don’t do it habitually.

• Budget out a certain amount of money to bet, and don’t exceed it.

• Treat your bets as entertainment expenses, not investments.

Term of the month: Santa Claus rally

Late December is a time of gift-giving, meals with family and, statistically speaking, higher stock market returns.

Santa Claus may not be real, but historical data shows that the so-called “Santa Claus rally” is.

What is the Santa Claus rally?

The Santa Claus rally refers to the anomalously high average returns of the stock market during the last five trading days of December and the first two trading days of January.

According to a 2023 study by LPL Research, from 1950 to 2022, the S&P 500 index posted an average return of 1.3% during this holiday period, compared with an average return of just 0.2% for all other rolling seven-day periods ^[0]

The effect isn’t huge in absolute terms — but the presence or absence of a Santa Claus rally in a given year is sometimes viewed as a signal for what investors should expect in the year ahead.

LPL’s data shows that the S&P 500 rose during the Santa Claus rally period in 80% of the years from 1950 to 2022. After those “nice” years, the index posted an average annual return of 10.4%. But after the 20% of “naughty” years that lacked a Santa Claus rally, the index only posted an average annual return of 4.1%.

Should you try to profit from the Santa Claus rally?

When it comes to long-term investing, financial advisors generally don’t recommend trying to time the market. They’re more likely to recommend consistent, low-maintenance investing strategies such as dollar-cost averaging into index funds.

For day traders who want to try to profit from the Santa Claus rally, it’s worth noting that the effect may be concentrated in certain areas of the market and certain days of the period.

A 2016 study published in the Managerial Finance journal found two nuances to the Santa Claus rally effect:

• The abnormal positive return is larger among small-cap stocks than large-cap stocks.

• The positive returns are generally concentrated in a three-day period: the last trading day in December and the first two in January ^[0]

  Managerial Finance. Santa Claus Rally and firm size.

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Dates that could move markets this month

Economic events

• Friday, Dec. 6: Bureau of Labor Statistics monthly employment report. A report showing hiring levels and various measures of the unemployment rate. 

• Wednesday, Dec. 11: BLS consumer price index (CPI) report. A key inflation gauge. The employment and CPI reports could give investors hints about what the Federal Reserve will do with interest rates in future meetings; unexpectedly high unemployment or low inflation could indicate that rate cuts are on the way. 

• Wednesday, Dec. 18: Federal Reserve interest rate decision. The Fed will conclude its meeting and announce the new level of the federal funds rate. It is expected to announce a 0.25% cut, but it could also keep rates unchanged. The Fed will also release a summary of economic projections showing its estimates of future interest rates.

• Friday, Dec. 20: Michigan consumer survey data for December. The University of Michigan will release its preliminary data for this month’s survey on Dec. 6 and its final data for this month’s survey on Dec. 20. The survey has become a closely watched indicator of ordinary Americans’ perceptions of the economy.

Earnings

Below is a table of blue-chip stocks that are reporting earnings in December, with the expected dates and average analyst estimates for their upcoming earnings reports.

We've filtered the list for companies with a market capitalization of at least $100 billion. These are high-volume stocks whose earnings reports are often major trading events for options traders and day traders.

No data above? Log in or register for a NerdWallet account to see the full earnings calendar.

Source: Nasdaq.com. Data is current as of Dec. 2, 2024, and is intended for informational purposes only.

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