US Stocks and Bonds Take a Hit on 2024 Kickoff: Here's What You Need to Know
On the first trading day of 2024, both U.S. stocks and bonds experienced a disappointing start, leaving investors who had hoped for a strong continuation of the 23Q4 rebound feeling crestfallen.
In equity markets, a pullback in tech stocks led the $NASDAQ 100 Index (.NDX.US)$ to drop 1.68%, marking its third-worst first-day performance since the bursting of the dot-com bubble in 2001. The $S&P 500 Index (.SPX.US)$ also fell by nearly 0.57%, while the $Dow Jones Industrial Average (.DJI.US)$ barely stayed above the flatline, rising only 0.07%.
Meanwhile, U.S. Treasury yields across all maturities rose higher, with short-term $U.S. 2-Year Treasury Notes Yield (US2Y.BD)$, which is more sensitive to interest rates, leading the selling pressure, rising 10 bp during the session. The benchmark $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ once again approached 4%.
Reasons behind falling bond prices:
The US Treasury yields saw a significant drop in the last quarter of 2023, primarily due to the alleviation of inflation and the boost to market sentiment from expectations of a rate cut by the Fed in 2024. However, the performance of US Treasuries on the first trading day of 2024 reflected doubts in the market about the extent of the Fed's shift towards a more accommodative monetary policy. Traders may have reduced their bets on a rate cut by the Fed this year, as the selling pressure on 2-year Treasury, which are sensitive to interest rates, was particularly significant.
According to CME's FedWatch tool, traders currently estimate lower probabilities of rate cuts at all eight FOMC meetings in 2024 than they did the previous day. The latest data shows that traders estimate a 67.1% probability of a rate cut of at least 150 bp by the end of this year, down from 75.7% the previous day. In addition, the issuance of a large number of new corporate bonds has put pressure on spreads, adding to the stress in the bond market.
Reasons behind the decline in U.S. stocks:
1. Overheated Market Sentiment and Profit-Taking Behavior May Be the Most Direct Reasons for the Recent Downturn
As we have noted in previous articles, several technical indicators - including the CNN Fear and Greed Index, the put/call ratio, the VIX index, and the AAII U.S. Investor Sentiment Bull-Bear Spread - currently suggest that U.S. stocks are overheating. As a result, any deviation from these high expectations could trigger a significant market correction. Furthermore, following the sharp rise at the end of 2023, a new round of profit-taking may also contribute to a downturn in the market at the beginning of the New Year.
“The most common concern or belief we have heard from investors is that overbought conditions and euphoric sentiment will set up for a reversal to start 2024 in both bond yields and stocks, ” said Dennis DeBusschere, founder of 22V Research.
2. Concerns of Economic Slowdown May Be Reigniting Once Again
On Tuesday, the US Department of Commerce reported that US construction spending in November increased by 0.4% compared to the previous month, falling short of the expected 0.6%. On the same day, the final reading of the December US Purchasing Managers' Index (PMI) for manufacturing was released, dropping to 47.9, lower than the initial reading of 48.2 and November's 49.4, indicating continued pressure on the manufacturing sector.
A series of economic data that did not meet expectations have heightened concerns in the market about the possibility of a slowdown in US economic growth.
3. Rate Cut Bets Are Decreasing
As indicated by CME's FedWatch tool, traders are reducing their bets on a rate cut by the Fed in 2024. Meanwhile, some Wall Street analysts believe that the Japanese earthquake that occurred at the beginning of the year and the escalating tensions in the Middle East have increased safe-haven demand, driving up oil prices, which could further increase inflationary pressures and add to the uncertainty of the Fed's monetary policy.
4. Tech Stocks that Led the Charge in 2023 Now Leading the Decline, Two of the Magnificent Seven See Significant Target Price Downgrades
On Tuesday, Barclays analysts downgraded their rating on $Apple (AAPL.US)$'s stock to "underweight" due to weak consumer demand and simultaneously lowered their target price to $160, which represents a decline of over 10% from the current price level. As a result, Apple's stock price fell 3.6%, marking its biggest decline in five months.
In addition, Roth Capital analyst Craig Irwin, who has a long-term bearish view on $Tesla (TSLA.US)$, recently reiterated his target price for Tesla at $85, which is more than half below the current price level. Despite exceeding its delivery volume targets, Tesla was not immune to the Tuesday sell-off.
Other members of the Magnificent Seven, including $Microsoft (MSFT.US)$, $Meta Platforms (META.US)$, $Amazon (AMZN.US)$, $Alphabet-A (GOOGL.US)$, and $NVIDIA (NVDA.US)$, also fell in tandem. Given the concentrated position in large-cap tech stocks in the US stock market, a pullback in these stocks is likely to significantly weigh on the overall market performance.
"Crowding risk in the leaders of 2023 has been cited by many as a key risk in 2024; A January rout in mega-cap tech is now a consensus," wrote Savita Subramanian from Bank of America.
1.Series of Labor Market Data That May Affect the Fed's Decisions
The labor market data and signs of a rate cut are in focus this week. This includes the Job Openings and Labor Turnover Survey (JOLTS) to be released on Wednesday, and the nonfarm payroll report for December 2023 to be released on Friday. The labor market situation will impact the Federal Reserve's next monetary policy decisions.
In addition, the minutes of the Federal Reserve's December monetary policy meeting will be released on Wednesday.
“Returning from the holidays, investors this week are most likely to focus on theseries of labor market datareleases in order to gauge how soon the Fed will start cutting rates,” wrote Saxo Bank analysts in a research note.
2. Earnings Performance in the New Earnings Season
John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management, one of Wall Street's most optimistic analysts, believes that the current pause in the market's gains is justified, and that attention will soon turn to the fourth-quarter earnings season. Similarly, American financial celebrity Jim Cramer shares this view, noting that this recent shift in the stock market is temporary, and that there is often a lot of "repositioning" at the beginning of the year. Once companies announce their earnings, investors may start buying back stocks that performed well in December.
The fourth-quarter earnings season will kick off on January 12th with major banks such as JPMorgan Chase officially leading the way.
Source: Bloomberg, Yahoo Finance, Barron's, Morningstar
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Thomas Smith1 : Leave me alone
102886247 : delist all the feds and analysts
73159828 : Explain that 24 was a good year. Fall first and then rise, otherwise there's no room
Also, today's big idea is to cut interest rates (supposedly), so you always need to give some room
GWSCOGAL : I would call it that people are just taking profits in the new year, this pushes out tax implications to 2025.
小trader : Really good article. Enjoyed it! Thanks![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
151345481 : First drop for a month, then
11 months
71825845 : Very informative! Thanks
RaffeS62 : thanks for the info