What a fun question! My guess is that it has something to do with the American psyche of nearly always "rooting for the underdog." An ugly sweater is like Charlie Brown's Christmas tree. Both are rooted in good will. Therefore, we root for the ugly sweater just like we root for Charlie Brown's tree. We know in our hearts that those things stand for goodness, and we wish them the best!
Everyone of us has an ugly sweater complex hidden somewhere in the recesses of our souls. And then there is that physical part of us which we wish were cuter. For example, a woman with a big nose would probably prefer to have a cute, perky nose. But her nose is part of her heritage, so rather than fix it, she honors her "ugly nose/sweater" heritage. Anyway, that's what I think of when I see ugly sweaters. It's a way of saying, "Look, we can be beautiful even when we're not the cutest sweater in town." The ugly sweater also says, "Merry Christmas to one and all..." And in my humble opinion, that's a good thing.