Trading Diverging Economies: Profit from Uneven Global Growth

As 2025 draws to a close, regional economies are moving in different directions. The US economy is slowing amid consumer pullback, while Europe is stabilizing, with steady growth and cooling inflation, thanks to future fiscal support from governments. However, China is still struggling to ignite internal demand. The anticipated Fed rate cut, driven by easing inflation, is likely to weaken the USD, creating forex trading opportunities.

Meanwhile, in their Global Outlook – Q4 update, analysts at BlackRock are focusing on infrastructure stocks, fixed income assets like short-term inflation-linked bonds (especially if US tariffs drive inflation up), and emerging markets over developed market stocks.

The final quarter of the year brings unique shifts to the financial markets. The holiday spirit, rampant sales, and institutional traders going on leave lead to seasonal trends. Understanding these patterns and adjusting your trading strategy is crucial to capturing market opportunities at this time.

Market Behaviour at the Year-End

The last three months of the year, especially the holiday season, see a change in market activity. Trading volumes often decrease significantly as many institutional investors take time off. This lower liquidity coupled with divergent economies can lead to more volatile price swings. Big trades can have a larger-than-normal impact on the market. 

However, this year, the consensus suggests that the diverging economic performance and policy uncertainty are likely to dominate and potentially override the typical year-end seasonal trends. This is especially true of certain segments of the market.

The Push of Diverging Economies

The primary force challenging this year’s seasonality is the divergence in global economic and monetary policy. Major economies are no longer moving in lockstep, creating crosscurrents that could introduce volatility and selective performance. Here is a breakdown.

Other factors that are likely to drive typical seasonality include:

Bullish Tendencies and Rallies

The period is generally associated with positive market sentiment and performance, a phenomenon often referred to as the “Santa Claus Rally.” This rally typically occurs during the last five trading days of December and the first two trading days of the new year. The general festive cheer and optimism for the new year contribute to this bullish momentum. Since many institutional investors are on holiday, bullish retail investors tend to have a greater influence on the market. Retail traders reinvesting their year-end bonuses tends to boost market activity.

Tax-Loss Harvesting

Investors sell assets that have lost value before the year-end. The goal is to offset capital gains from other profitable investments and reduce their overall tax liability. This activity can cause selling pressure on underperforming stocks in early December. This, in turn, can create bargains, which are then often bought up later in December or in the new year. However, these price declines are often temporary.

In late 2024, despite broader market strength, there were periods of increased volatility, particularly in mid- and small-cap stocks. This volatility provided opportunities for tax-loss harvesting in specific underperforming stocks, which then led to brief selloffs, followed by reversals as buying resumed in early January.

Portfolio Rebalancing 

This is also the time of year when large investors adjust their holdings. They realign their portfolios back to target allocations. This is a common part of their long-term trading strategy. For instance, if stocks performed very well, they might sell some to buy bonds. This action can cause large, sudden trades that impact specific stocks or sectors.

Window Dressing

Fund managers engage in this practice. They sell stocks that have performed poorly and buy well-performing stocks just before the end of the year. The goal is to improve the appearance of their portfolio reports. This activity creates temporary buying pressure on the year’s winners. It can amplify the Santa Claus Rally. For instance, technology and high-growth stocks often saw late-year portfolio adjustments, as managers “dress up” their holdings to reflect outperforming assets.

Despite the general bullish bias, December can be one of the more volatile months due to lower trading volumes and speculation. Sectors linked to consumer spending, such as retail and consumer goods, often see increased activity and performance due to the holiday shopping season. However, the money markets can experience increased liquidity risks and higher overnight rates as banks reduce their lending towards the year-end to shore up their balance sheets.

How to Trade the Year-End Markets Under Current Conditions

Here are some useful tips to adjust your trading strategy for different asset classes.

Stock Trading

Be Patient. Wait for the selling pressure from tax-loss harvesting to end. You may find good entry points on solid companies that were sold off for tax reasons. Plan your trades to capture the Santa Claus Rally. Look for established upward trends and avoid shorting the market.For the strongest-performing stocks, consider a short-term long position into mid-to-late December to capitalise on window dressing. But be prepared for a sharp reversal immediately after the year-end.Focus on high-growth themes, such as AI, green energy, infrastructure, and technology/IT, which are expected to see continued growth. However, since trading volume is low at this time, use tighter stop-loss orders to protect your capital.

Forex Trading

Forex trading volume drops as major centres like London and New York slow down for the holidays. This can lead to wider spreads, which means your transaction costs can go up. Consider taking a break between Christmas Eve and New Year’s Day. This is when liquidity is the lowest and the risk of unexpected volatility is highest. Use this time to prepare your trading strategy for the new year. Also, keep an eye on central bank announcements. Any changes in interest rates could impact the domestic currency. If you trade major pairs during the last two weeks of December, consider using wider stop-losses or reduced position sizes to account for potentially erratic moves. Focus on strong, established trends rather than intraday noise.

Commodities Trading

Keep an eye on geopolitics, paying close attention to supply chain news. Holiday schedules can affect the production and transport of industrial metals or agricultural products. Plus, the US dollar’s year-end performance significantly impacts commodities trading. A weaker dollar makes dollar-priced commodities cheaper for foreign buyers. This often pushes prices higher. Also, remember that assets like oil and gold are less affected by tax-related stock moves. Volatility in oil prices can be tied to inventory reports and geopolitical developments, but general liquidity also thins at the year-end. Crude oil prices in late 2024 were sensitive to the OPEC+ production cuts and Middle East tensions, which overshadowed the low-volume period.

Final Trading Strategy Checklist

The year-end is a time for review and preparation.

• Review your journal: Look at your year’s performance. Identify what worked and what didn’t.
• Adjust risk: Lower your position sizes during periods of very low liquidity. Protect your profits.
• Set up for Q1: Plan your trading strategy for the first quarter of the new year. Research potential strong sectors early.
• Consult a tax professional: Understand the tax implications of all your realised gains and losses. This step is as important as the trading itself.

By understanding year-end patterns and adjusting your risk, you can finish the year strong. Successful trading requires discipline and preparation, especially during the quiet holiday season.

To Sum Up

• Markets are affected by the optimistic investor sentiment during the holiday season.
• Trading volumes decrease as institutional investors take time off.
• Institutional investors also undertake tax loss harvesting, portfolio rebalancing and window dressing at this time, which affects the markets.
• Look for selling pressure due to tax loss harvesting to find stock trading opportunities.
• Keep an eye on technology and high-growth stocks.
• Forex trading volume and liquidity decrease at this time, which can lead to higher spreads.
• Follow geopolitical and supply chain news while trading commodities.
• Diverging global economies may impact seasonal trends

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