U.S. stocks and bonds began the first trading week of the new year on the weak side, giving back some of the gains made during the last six weeks of 2023.
The S&P 500 closed at 4,697.24, down 1.30% for the week; the Dow Jones at 37,477.11, down 0.45%; the tech-heavy Nasdaq at 14,524.07, down 2.78% and the small-cap Russell 2000 at 1951.14, down 3.6%.
The decline in equities followed the lower bond prices, which drove yields higher. The benchmark 10-year U.S. Treasury bond ended the week with a yield of 4.04%, up from 3.91% from the previous week after trading as high as 4.07% in early Friday trade.
The sum of all fears among traders and investors over valuations and the direction of monetary policy fueled the reversal in the fortunes of the U.S. equity and bond markets.
Anthony Denier, CEO of leading stock trading platform Webull, told International Business Times that the market's decline during the first week of the year came about because of a combination of factors like fears that markets are too optimistic about Fed's pivot — interest rate cuts; fears that equities, especially large-cap mega-tech shares, are overbought and overvalued after the stock market's year-end run-up and fears that inflation may head north again.
Then there's the fear that rising tensions in the Red Sea and low water problems with the Panama Canal will fuel new supply chain bottlenecks, increasing shipping rates and inflation. For instance, the Baltic Exchange's main sea freight index, which measures global shipping costs, rose about 1.2% to its highest since Dec. 20, 2023, at 2,110 points on Friday. In addition, the Capesize index for large cargo transportation of iron ore and coal rose for a fifth straight session, surging 4% to 3,798 points.
"The week started with many investors believing that the market expectations for six interest rate cuts that will start in March are unrealistic," Denier said, elaborating on Wall Street action during the week. "On Wednesday, the Fed proved that point by saying they would keep interest rates at their current level for longer than the market expects and probably only cut three times this year."
In addition, Denier believes that after a spectacular rally in the last two months of 2023, many investors seemed to feel that the market had become frothy and euphoric and, hence, had overbought trendy technology names. "The selloff in large tech was sparked by a Barclays downgrade of Apple's stock," he added. "This showed investors it might be a good time to take some profits."
The negative investor sentiment spread to the debt market, with U.S. Treasury yields increasing, reflecting the lowered expectations for rate cuts this year. "This added more fuel to the selloff in growth and tech stocks, which tend to do poorly in high interest-rate environments," Denier continued.
Following a robust labor market report, things got worse for the bulls on Friday.
"Hiring was strong in December, but the details of the jobs report point to some odd trends under the hood," Callie Cox, U.S. investment analyst at eToro, told IBT.
"Wage growth accelerated year-over-year for the first time in five months, an unnerving sign for people worried about inflation," he explained. "Labor force participation also dipped noticeably in December."
A solid labor market report and rising wages make it less likely for the nation's central bank to cut interest rates sooner rather than later.
"The totality of the data shows that the job market is still staggeringly strong, especially when you consider the wage pressure on the economy," Cox added. "But this particular report may not be good enough to please a market obsessed with rate cuts."
Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, agrees. "The gist of Friday's NFP data is that the labor data is simply too strong to justify the early easing of rates," he told IBT. That supports a QQQ bear case. Orthodox economics teaches that high productivity allows the FED to keep higher rates in place without recession risks."
Still, Holzer sees a closer to 50% March probability that the FED will ease even 50 bps without a recession.
But that probability could change in either direction next week, following a string of data on inflation (inflation expectations and December CPI and PPI).
Denier expects the investor fears discussed earlier to persist until the earnings season kicks in, setting a new direction for Wall Street. "I don't see any of the above factors changing soon, and earnings season is beginning," he said. "Earnings reports will bring forth what companies expect to see this year. These expectations could have a large effect on the market's direction."
