The expectation of the "Santa Claus market" became an important driving force for the rise of the US stock market in the early part of last week. However, the holiday cheer on Wall Street suddenly ended before the weekend.
The widespread sell-off swept through technology and growth stocks, causing the Chicago Board Options Exchange Panic Index (VIX) to rise more than 20% during trading. The rise in US bond yields has attracted the attention of investors, who are currently only 12 basis points away from the year's high, which has a negative impact on risk appetite and signals of profit taking in the market. As the new year approaches, the game between the prospect of interest rate cuts, expectations of Trump's policies, and the shrinking trading volume during the holiday period may bring more volatility pressure to the market.
December 31st will be the last trading day of 2024. So far this year, the Nasdaq index has risen by 31%, and the S&P 500 index has risen by 25%. The Dow Jones Industrial Average rose by 14%.
Market research institution D A. Davidson stated in a report to clients, "As we enter 2025, investor sentiment is high as the November (US presidential) election results boost some positive trends for 2024, triggering expectations for pro growth policies. If the US economy continues to grow by more than 2% and corporate profits increase by more than 10%, this will create conditions for stock prices to rise
The market views the prospect of interest rate cuts with caution
As the Christmas holiday approaches, data is relatively light, and holiday consumption data, as a key barometer of the economy, has attracted more attention.
On the 26th, Mastercard released its "Spending Pulse" report, which showed that from November 1st to December 24th, US retail sales increased by 3.8% year-on-year, surpassing the 3.1% growth in the 2023 holiday season and significantly better than market expectations of 3.2%. This credit card company stated that holiday shopping for the last five days of this year is expected to reach 10% of the annual sales.
At the same time, the overall stability of the labor market. The US Department of Labor reported that the number of initial jobless claims decreased by 1000 to 219000 last week, better than market expectations. The number of renewed jobless claims increased by 46000 to 1.91 million, reaching the highest level since November 13, 2021. As supply and demand become more balanced, the unemployed need longer time to find another job. Recent surveys have shown that as Trump is about to take office, some companies are considering whether to add more job positions.
Bob Schwartz, a senior economist at Oxford Economics, said in an interview with First Financial News that consumption continues to be the backbone of the economy, and the job market is a key factor. "Compared to last year, the labor market continues to cool down, but it is still characterized by slower job growth rather than large-scale layoffs. Unemployed people find it harder to find jobs, but slower labor growth should be able to offset the upward pressure on the unemployment rate
The yield of medium and long-term US Treasury bonds continues to rise. The 2-year US Treasury bond, which is closely related to interest rate expectations, rose 1.4 basis points to 4.325% weekly, and the benchmark 10-year US Treasury bond rose 9.7 basis points to 4.619% weekly, continuing to reach a new high since May this year. Federal funds rate futures show that after three consecutive interest rate cuts, the Federal Reserve may remain inactive for a period of time, with a probability of just over 50% for a rate cut in April next year.
UBS Wealth Management's Chief Investment Officer's Office (CIO) suggests preparing for a slower pace of interest rate cuts by the Federal Reserve. The institution believes that due to stronger than expected US inflation data and a more hawkish tone released by the Federal Reserve meeting, it is expected that the US will only cut interest rates by another 50 basis points in 2025.
Schwartz told First Financial that the Federal Reserve announced a hawkish 25 basis point interest rate cut, and some Fed officials considered trade and inflation issues in their forecasts. This may bring uncertainty to the economy, such as higher interest rates putting pressure on the real estate market, easing the rebound in manufacturing, and reducing the incentive to build inventory before potential tariffs. However, from the Federal Reserve's recession model, the probability has dropped to a low since 2022. Schwartz further stated that consumer spending has not slowed down correspondingly, and a healthy balance sheet and strong wage growth remain supportive, "he said.
US Treasury yields impact the market
Last week, the market first suppressed and then rose, and the final adjustment did not stop the three major stock indexes from recording weekly bullish lines.
Dow Jones market statistics show that in the past week, various industries have seen more gains than losses, with energy and healthcare leading the way with gains of over 1%, while only the consumer goods and raw materials sectors have fallen. The 0.9% weekly increase in the heavyweight technology sector was attributed to several major chip stocks, with Broadcom soaring 9.5% and Nvidia rising 2.1%. The financial sector has performed well, with some US financial institutions and business groups filing lawsuits against the Federal Reserve over the so-called "flawed" stress testing framework. The non essential consumer goods sector rose 0.5%, while coffee chain Starbucks surged nearly 5% after employees returned to work after a five-day strike.
US stock funds have recovered from last week's sell-off, attracting a large influx of funds thanks to better than expected inflation reports, government avoidance of shutdowns, and the so-called 'Santa Claus market'. According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, US stock funds achieved inflows of $20.56 billion in the seventh week of the eight week period, compared to net sales of $49.7 billion in the previous week. Investors are focusing their investments on US large cap funds, with net purchases reaching $31.67 billion, the highest level since October 2, after a week of net sales of $20.94 billion. At the same time, small cap and mid cap funds experienced outflows of $2.95 billion and $1.17 billion, respectively.
The trend of US Treasury yields has become the main factor causing market volatility in the late trading session. Michael Reynolds, Vice President of Investment Strategy at Glenmede Trust, said, "Whenever interest rates rise like this, the cost of capital becomes higher, and investors may be paying attention to some valuations of the seven major stock indices and wondering if they can find better value elsewhere." Reynolds believes that this is a very normal profit taking, "We have been in a very strong bull market for over two years... so it is not surprising to see some people taking profits and rebalancing their investment portfolios before the New Year
In its market outlook, Credit Suisse wrote that there were concerns about the potential higher yield, but as long as the yield of the 10-year treasury bond remained below the key 5.0% level, the bull market theory was still intact. As the yield rises, the risk premium of stocks deteriorates, and for consumers, businesses, and governments, borrowing costs increase, making fixed income a more attractive alternative to stocks.