But it's missing something. There's no dragon. Every nativity set needs a red dragon.
If you don't remember that part of the story, you might want to read chapter 12 of Revelation. The writer, John, sees a woman about to give birth who is being threatened by a red dragon. The dragon wants to devour the infant, but the baby and the woman are rescued.
We could talk a lot about the interpretation of each symbol, but John, the author, leaves no doubt as to who the child is. He says, "She gave birth to a son, a male child, who will rule all the nations with an iron scepter" (Revelation 12:5). That's language used in the Bible to describe Jesus himself (see Psalm 2, for example).
Why would there be a dragon at Jesus' birth? Because Jesus came into this world in the middle of conflict. His birth was a joyous time for his parents, but also one of hardship and fear. Their family was shuffled about from Nazareth to Bethlehem to Egypt and back to Nazareth, moved by political forces beyond their control. People suffered and died because this baby came into the world.
There was a red dragon. Not a literal one, of course. The dragon is a symbol of that great enemy of God, Satan. Specifically, the dragon is Satan working through King Herod to try and exterminate the newborn King of the Jews.
The red dragon has a place in the nativity story. The dragon reminds us why we needed a Savior in the first place. John tells us that the dragon is the ancient serpent that deceives the whole world (Revelation 12:9). He is the tempter that brought about the fall of mankind in the Garden of Eden. Through his lies, sin came into the world.
The dragon is part of the story. Without it, a nativity scene can be too clean, a bit too perfect. We need to remember the sin and suffering. We need to remember why we needed a Savior. And still need one today.