The Dow Jones Industrial Average rose on Monday, driven by gains in the financial and materials sectors linked to AI developments. This movement occurs as equity markets aim to end the trading year on a bullish note leading into the Christmas holiday.
The New York Stock Exchange will close early on Wednesday, with market momentum expected to stay quiet into the new year as many step aside. Real economy stocks like construction materials saw a rise of nearly 1.5%, and the banking sector increased by 1.3% after the Federal Reserve’s third consecutive rate cut.
Market Reactions to Inflation Figures
Market reactions to recent inflation figures are calm despite issues within the latest Consumer Price Index report. The US government’s recent shutdown delayed important data collection, leaving a gap in key inflation points, including a zero percent report on rents and shelter costs.
Investors are cautious, awaiting further rate cuts while remaining wary of the current CPI report due to data downtime. Upcoming US ADP Employment change and GDP growth figures are expected to provide the last bit of US economic data before the holiday market closure, with the labour market showing ongoing weakness. US GDP growth is expected to slow to 3.2% in the third quarter.
With markets leaning bullish into a short trading week, we are looking for a potential “Santa Claus rally” to close out the year. Historically, the S&P 500 has averaged a 1.3% gain during the final five trading days of the year and the first two of the new year, a pattern traders may bet on with short-term call options on index ETFs like SPY or DIA. However, with markets closing early on Wednesday, the window for this is rapidly shrinking.
The expected low trading volume could amplify price swings, making this a prime time for us to consider volatility plays. The CBOE Volatility Index (VIX) is currently trading near 13, which is relatively low and could make call options on the index an affordable way to hedge against a sudden market shock. Given the deep uncertainty surrounding the flawed CPI inflation data, protecting our long positions is a sensible move.
Strength in Financials and Materials
We are seeing strength in financials and materials, which are reacting positively to the Federal Reserve’s third rate cut and hopes for more easing in 2026. This is similar to the rally we witnessed in late 2023 when the Fed first signaled an end to its rate-hike cycle, sparking a run in interest-rate-sensitive stocks. Call options on ETFs like XLF for financials could capture further upside if this sentiment holds.
Tuesday’s release of ADP employment and GDP figures represents the last major economic event of the year, and it could easily move the market. The consensus forecast for Q3 GDP is a slowdown to 3.2%, which, if missed, could quickly reverse the recent positive mood. We should be prepared for a potential downside surprise, making protective put options on major indices a key consideration for the next 48 hours.
