Market Snapshot: U.S. stocks struggle for direction as investors return from Christmas and look ahead to 2023

See more: What to expect for the stock market in 2023 after the biggest decline since the financial crisis

What’s driving markets?

Friday marked the start of the so-called Santa Claus rally period — the final five trading days of the calendar year and the first two trading days of the new year. That stretch has, on average, produced gains for stocks, but failure to do so is often read as a negative indicator.

Read more: How a Santa Claus rally, or lack thereof, sets the stage for the stock market in first quarter

Investors drew some optimism from news that China will drop quarantine requirements for incoming travelers starting in January. Those travelers will still need to present a negative COVID test within 48 hours of travel, but will no longer need to routinely isolate five days in a hotel, followed by five days at home.

Increased activity in China, however, could prove to be a mixed blessing when it comes to inflation outside the country, said Stephen Innes, managing director of SPI Asset Management, in emailed comments.

“The good news is that inflation subsides as China reprises its role as a supplier of low-cost goods globally and supply chain bottlenecks ease. Still, the bad news is as growth accelerates through Q1, China’s insatiable demand for raw materials and all things energy will push up prices of those commodities, much of to the consternation of the Fed and ECB,” he wrote.

The U.S. trade deficit in goods narrowed 15.6% to $83.3 billion in November, according to the Commerce Department’s advanced estimate released Tuesday. In October, the deficit widened to $98.8 billion from $92.6 billion in the prior month. Economists polled by Econoday were looking for the deficit to narrow only to a $97 billion in November.

The U.S. S&P CoreLogic Case-Shiller 20-city house price index fell 0.5% in October, its fourth monthly decline. Year-over-year prices rose rose 8.6%, slowing from 10.4% in the previous month. A broader measure of home prices, the national index, fell a seasonally adjusted 0.3% in October from September.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said housing, compared to other parts of the economy, is more directly and quickly affected as higher Fed funds rates translate into higher mortgage rates.

It has an immediate impact on homebuyers’ estimated monthly payments, and thus reduces the amount of house that they can afford, Zaccarelli wrote in emailed comments.

“We don’t see the homebuying trends reversing until the Fed pauses their rate hikes and then signals that they will be cutting rates and this could take until late 2023 or 2024, so this could process is likely to take a long time,” he added.

A separate report from the Federal Housing Finance Agency showed home prices remaining flat in October, down from a 0.1% gain the prior month. And over the last year, the FHFA index was up 9.8%.

Companies in focus

• Airlines were in focus as the U.S. tries to recover from a deadly winter storm. Shares of Southwest Airlines Co. 
  LUV,
  -5.83%
  fell 4.7%, after the airline was forced to cancel 2,800 flights — more than its rivals — with more cancellations expected this week due to weather. The U.S. Transportation Department said it would probe Southwest’s cancellations.

• Shares of Tesla Inc.
  TSLA,
  -8.17%
  sank 8.1% after the electric vehicle maker extended the production suspension its Shanghai plant on Saturday as COVID infections surge in China. 

• Shares of China-based companies that are publicly listed in the U.S. jumped after the government announced the easing of COVID restrictions. Alibaba Group Holdings Ltd.
  BABA,
  +4.55%
   rose 4.1%, while Baidu Inc. 
  BIDU,
  +3.49%
   moved up by 4%.

• Peloton Interactive, Inc. 
  PTON,
  -6.36%
  stocks were down 6% after the fitness company said it will offer refurbished bikes in the U.S. and Canada at a discount of up to $500 over new bikes.

See: Airlines faced a difficult Christmas of storms and sickness, says Cowen: Who fared best and worst?

— Barbara Kollmeyer and Mike Murphy contributed to this article.