After a brief holiday, the stock market continued to decline before the market on the 30th local time and continued until the close, which disappointed many investors who hoped for the Santa Claus market.
After the Federal Reserve's year-end decision, the yield on US Treasury bonds once approached the 4.60% mark, putting pressure on tech growth stocks that had previously led the market. As the handover of the new government approaches, the advancement of Trump's policy proposals and the cooling of expectations of Federal Reserve easing continue to put pressure on US bonds, which may bring greater valuation shocks and volatility risks to the market.
Risk appetite under pressure
After hawkish interest rate cuts by the Federal Reserve, concerns about inflation stickiness and the prospect of President elect Trump's policy agenda reigniting inflation have pushed the benchmark 10-year Treasury yield to its highest level since late May.
Unlike traditional interest rate cuts that suppress US bond yields, although the federal funds rate has been lowered by 75 basis points since September, the 10-year US Treasury bond has climbed nearly 100 basis points in the past three months. Wall Street believes that the resilience of the US economy may prevent further decline in inflation and reduce opportunities for further monetary easing.
Last Friday, investors' concerns about stock market valuations were already evident. David Morrison, senior market analyst of trade nation, a research institution, said: "If the yield continues to remain at these levels... this will constitute a strong resistance to stock prices, because investors choose the relative security of the return on treasury bond funds close to 5%, while the uncertainty of stocks is great, and many of the stocks are trading at or near historical highs."
According to Quasar Elizundia, a research strategist at brokerage Pepperstone, the continued rise in bond yields, driven by a reassessment of expectations for less restrictive monetary policy, has raised some concerns. "The Federal Reserve may maintain a restrictive monetary policy for a longer period of time than expected, which could lower expectations for corporate profit growth in 2025 and subsequently affect investment decisions
Investors may also be cautious about the rapidly growing supply, as Trump has promised tax cuts but has few specific proposals to curb the budget deficit. The market expects that Trump will issue at least 25 executive orders when he takes office on January 20 next year, covering a range of issues from immigration to energy and cryptocurrency policies. The changes made by the second Trump administration to immigration, trade, and fiscal policies may be meaningful, but there won't be some more dramatic proposals, "Goldman Sachs analyst David Mericle said in a report on Sunday evening.
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 top 7 tech stocks and wondering if they can find better value elsewhere." He further analyzed, "We have been in a very strong bull market for over two years... so it's not surprising to see some people taking profits and rebalancing their investment portfolios before the New Year
Pay attention to the 5% level
In recent years, there has been a strong negative correlation between the trends of US bonds and US stocks.
The team led by Julian Emanuel, Chief Strategist at Evercore ISI, a research institution, stated that this may continue to be a problem for the stock market in the coming months, with "long-term profits driving stocks; however, even if the macroeconomic background remains favorable, rising long-term returns can sometimes put medium-term pressure on stocks
Emmanuel believes that the benchmark yield may fall back in the coming days after a strong surge. There are many reasons, including the withdrawal of high short positions in treasury bond bonds and the possibility of easing geopolitical tensions in oil sensitive areas, which will ease inflation concerns.
However, the above Trump policy, fiscal deficit factors, and the possibility that China and Japan may reduce their purchases of US treasury bond bonds may all push up yields in the medium term. Therefore, the increased volatility of bonds and stock markets is the basic situation at the beginning of 2025. "It is worth noting that the relationship between yield pressure and stock prices is not stable, and there are valuation pauses (2018) and valuation expansion (1994, 2022)."
The report wrote that for decades, there was no unified "threshold" for the stock market correction triggered by the yield of 10-year treasury bond bonds. In fact, the past "trigger level" ranged from 3% in 2018 to 6% in 1994. For the current cycle, he believes that the yield of 10-year treasury bond is 4.5%, which can be overcome by the stock market. However, if the benchmark yield breaks through 4.75%, the stock market will experience a "longer and deeper correction".
Emmanuel has set a warning line of 5%, where the temporary low point of the US stock market in October 2023 will occur. This corresponds to the 3% yield on 10-year US Treasury bonds under Trump's tariffs and immigration policies in the second year of his first term in 2018, reaching or exceeding this level, which poses a greater threat to the cyclical bull market. However, after experiencing turbulence in the early part of next year, the institution still remains optimistic about the full year performance of the US stock market, predicting that the S&P 500 index will reach 6800 points by the end of 2025, with a 15% margin from the closing price on the 30th.
Coincidentally, Credit Suisse Financial also believes that as long as the yield of 10-year treasury bond remains below the key 5.0% level, the bull market theory of the US stock market is 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.