Wall Street was hit hard! U.S. stocks and bonds had a bad start in 2024, the worst start in more than 20 years

Traders had hoped that a broad market rebound late last year would extend into 2024, but were greeted with a cold shower on the first trading day of this year, with stocks and bonds experiencing one of their worst starts in decades.

The SPDR S&P 500 ETF Trust (SPY) and the iShares 20+ Year Treasury Bond ETF (TLT) both fell 0.6% on Tuesday, the first time both have fallen sharply at the beginning of the year since TLT was launched in 2002.

While the first-day performance is not indicative of how the market will perform throughout the rest of 2024, the synchronized pullback in U.S. stocks and bonds at least suggests that investors are hesitant to chase the fourth-quarter rebound, with gains in both U.S. stocks and long-term Treasury bonds exceeding 10% last quarter.

“The most common concern we hear from investors is that overbought conditions and optimism will set the stage for a reversal in bond yields and stocks by early 2024,” said Dennis DeBusschere, founder of 22V Research. “It’s hard to argue with that.”

Is the US stock market just a temporary correction?

Tech giants, some of the biggest winners in the stock market in 2023, led the sell-off on Tuesday, with Apple plunging after a downgrade by Barclays analysts. The Nasdaq 100 fell 1.7%, its third-worst first-day performance since the dot-com bubble burst in 2001.

In a sign that money may be flowing out of recently favored stocks and into laggards that appear cheap, the Russell 1000 Growth Index fell 1.5% on Tuesday, while its value index rose 0.4%.

“Many (including ourselves) see the crowded trade in large-cap stocks as a key risk for 2024, with consensus now priced in a sharp January selloff for large-cap tech stocks,” Bank of America strategists led by Savita Subramanian wrote in a note.

Oppenheimer Asset Management said the rally in U.S. stocks could take a breather before the next earnings season.

“In fact, the pause in the market rally makes a lot of sense in our view, given the run-up in stock prices from the October lows into December,” said John Stoltzfus, the firm’s chief investment strategist.

Stoltzfus was one of the few who correctly predicted a surge in U.S. stocks in 2023. For 2023, he remains optimistic, predicting that the S&P 500 will reach 5,200 before the end of 2024. The index is still a few points away from a record closing high. "A close above the previous high could boost sentiment, driving stocks higher in the near term," the strategist said.

The focus will soon turn to the fourth-quarter earnings season, which officially kicks off on January 12 when major banks including JPMorgan Chase report earnings. Investors may have high psychological expectations after last year's surge in stocks. But even so, Stoltzfus still believes that the market will be higher before the end of the year. "Our expectation is that stock prices will rise further this year, supported by improving fundamentals," he said.

Declining market expectations for rate cuts trigger bond sell-off

A broad global bond sell-off, led by shorter-dated Treasuries, came as traders reduced bets that major central banks would cut interest rates sharply this year.

The benchmark 10-year Treasury yield rose 9 basis points to 3.97%, while similar-maturity German yields rose 9 basis points to 2.11%, the highest in more than two weeks, and 10-year U.K. gilt yields rose 15 basis points. The Bloomberg Dollar Spot Index recorded its biggest one-day gain since March 15.

That reflects doubts about whether policymakers will deliver on the degree of monetary easing that money markets are pricing in. While central banks have more or less signaled they may have ended their current rate hike cycle, they are reluctant to abandon their efforts to fight inflation too soon. A flood of new corporate bond issuance also weighed on bonds, especially after their strong performance toward the end of the year.

"Given the many corporate bond issuances announced today, I think supply issues are behind this move," said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities. "But from a bigger perspective, the market is still trying to find a foothold ahead of key data releases." The most noteworthy economic data this week is the December non-farm payrolls report.

U.S. money markets are currently pricing in about 150 basis points of interest rate cuts from the Federal Reserve in 2024, about 7 basis points lower than last week's close. Despite a slowdown in the pace of hiring, a resilient labor market supports the view that the economic expansion will continue in 2024.

Meanwhile, the Bloomberg Dollar Index rose more than 0.7% on Tuesday after selling pressure caused the greenback to fall about 5% in November and December. Some technical analysts noted that this came after its 14-day relative strength index fell below 30 early last week, a sign that the dollar was oversold and ready to reverse course.

Jane Foley, head of FX strategy at Rabobank, said: "The market may be expecting a rate cut from the Fed this year, but with so many rate cuts already priced in, market expectations are likely to be tempered. Assuming some rate cut hopes fade, the dollar is likely to strengthen first and then potentially weaken by the end of 2024."

Strategists on the Bloomberg Markets Live team believe that although the dollar has rebounded in recent days, it is likely to fall again. They believe that the Fed may cut interest rates more aggressively than other major central banks and may do so earlier.

The article is forwarded from: Jinshi Data