US Stocks Stumble in New Year as Fear Index Rises

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Savings News November 26, 2024

The start of 2025 has not been particularly favorable for the U.Sstock market, as the three major indices have shown the worst performance for this period since 2016. This disappointing trend has been influenced by a surge in job growth in December 2024, which has unexpectedly rekindled inflation fears among investorsConcurrently, rising U.STreasury yields have put additional pressure on risk appetites, leading to a dramatic spike in the Chicago Board Options Exchange Volatility Index (VIX), which surged by 21% over the past weekWith fresh inflation data on the horizon and the fourth-quarter earnings season approaching, heightened market volatility is anticipated to persist as we move into the upcoming week.

Federal Reserve Rate Cut Expectations Decline

Last week, one of the most closely-watched indicators by analysts and investors alike was the U.S

Department of Labor's report, which revealed that the economy added 256,000 non-farm jobs in December, significantly pushing the unemployment rate down to 4.1%. The stronger-than-expected job growth suggests a potential for more vigorous economic expansion, which could, in turn, drive up pricesInflation expectations have also shown signs of rising concern, as a survey conducted by the University of Michigan in January indicated that one-year inflation expectations rose to 3.3%, a notable increase from December's 2.8%, marking the highest level since May 2024. Meanwhile, five-year inflation predictions have accelerated from 3% to 3.3%. These developments have led the market to speculate that the Federal Reserve may need to adopt a more cautious approach regarding interest rate cuts this year in an effort to keep inflation in check.

Bob Schwartz, a senior economist at Oxford Economics, shared his insights in an interview, referencing the robust gains in the private sector service jobs which supported the overall rise in employment

He noted that the employment indicators from December have shown consistent strength, reinforcing the Fed’s perspective that a tapering of interest rate cuts in 2025 is appropriate.Meanwhile, rising long-term Treasury yields have been closely tied to interest rate expectationsThe two-year Treasury yield saw an increase of 11.5 basis points last week, reaching 4.394%, while the benchmark 10-year Treasury yield climbed by 17.7 basis points to 4.772%, marking its highest level in nearly a year.

According to the CME Group's FedWatch Tool, traders predict that the Federal Reserve will first lower borrowing costs in June, and then maintain a stable course for the remainder of the year.In the upcoming week, investors will closely monitor the release of the monthly Consumer Price Index (CPI). If this index comes in above expectations, it could trigger further volatility in the market

Bryant Van Cronkhite, a senior portfolio manager at Allspring, expressed concerns that, “In such a scenario, the market is likely to experience significant sell-offs, as the Fed might not only forgo cutting rates and supporting the market but might even raise them.”Schwartz also highlighted the challenges the Federal Reserve faces, referencing the minutes from the Open Market Committee meeting last DecemberHe noted that discussions have begun regarding the fiscal, trade, and immigration policies of the incoming administration, which could impact future policy decisionsAs the implications of these policies become clearer, the Federal Reserve's outlook will likely adjustHe anticipates that the Fed will remain on hold in January while continuing to review data trends without offering more guidance on future pathways.

Funds Opt for Caution

The disheartening start to the New Year for the U.S

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stock market has resulted in back-to-back weekly declines across the three major indicesThe latest employment data has significantly reversed rate cut expectations, negatively affecting risk appetites among Investors.Statistics from the Dow Jones indicate a rough week for various sectors, with most facing declinesThe real estate sector, significantly affected, plunged by 4.1%, while the technology and financial sectors both dropped by over 2.5%. The initial excitement from the CES technology expo failed to sustain momentum, as major tech stocks suffered from declines, despite Microsoft announcing an $80 billion investment in data centers and Foxconn revealing business metrics for December 2024 that momentarily energized the marketSoon after, rising Treasury yields dampened valuations, and rumors regarding restrictions on chip sales fueled market anxieties

On a brighter note, international oil prices propelled the energy sector which managed to increase by 0.9%, along with healthcare and materials sectors also posting gains.

In light of the uncertainty surrounding the Federal Reserve’s interest rate trajectory and the new government's impending tariffs, investors have largely adopted a wait-and-see stanceAccording to data provided to First Financial by the London Stock Exchange Group (LSEG), net outflows from U.Sstock funds over the past week amounted to $5.05 billion, against a backdrop of a flight to safety leading money market funds to haul in $56.19 billion—the highest in nearly a month.J.PMorgan remarked that the risks faced by a bullish stock market are intensifying, yet the chances of entering a bear market seem minimal given the backdrop of robust economic growth

“After the S&P 500 index surged more than 20% for two consecutive years, a pullback of 4% to 5%, or even 10%, could be on the horizon, but the bull market still remains intact with GDP exceeding trend levels.” Andrew Tyler, Global Market Intelligence head at J.PMorgan, noted in a client report.

In the coming weeks, investors will be particularly focused on the inflation data releasesAdditionally, the earnings season will kick off with major Wall Street institutions, including J.PMorgan, Wells Fargo, Citigroup, Bank of America, and Morgan Stanley, among the first to unveil their resultsAs an important economic barometer, the outlook from CEOs across various sectors will be pivotal.Charles Schwab emphasized in its market outlook that the surge in bond yields is the chief culprit behind the current market volatility, with the 10-year Treasury yield sitting at a 14-month high fueled by strong economic data and inflation concerns

The silver lining remains that robust economic growth could bolster corporate profit expansion; the U.Seconomy has increasingly shown its capacity to remain stable even in a heightened interest rate environmentNevertheless, concerns persist about the pace of rising yields and whether such trends will continue in the upcoming months.

The rising bond yields pose several negative implications for stocks: increased borrowing costs, tighter financial conditions, diminished attractiveness of equity risk premiums, and adverse market breadthNevertheless, from a bullish perspective, technical indicators have recently indicated overselling conditions, suggesting a potential for a reboundIf the 10-year Treasury yield drops below 4.70%, it could serve as a catalyst for a subsequent market reboundHowever, the short-term direction remains uncertain, primarily hinging on inflation data and the market's reaction to changes in bond yields.

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