On December 27, 2024, the last trading Friday of the year, the excitement surrounding the anticipated "Santa Claus rally" in the stock market quickly dissipated as the New York Stock Exchange opened with a heavy plungeThe market's darling this month—large technology stocks—suffered significant declines, contributing to a broader downturn.
Within the first hour and a half of trading, U.Sequities moved collectively towards the lows of the day, with the S&P 500 index experiencing a drop of 1.4%. The Dow Jones Industrial Average reported its first drop in six trading days, falling over 420 points or approximately 1%. The tech-heavy Nasdaq Composite tumbled nearly 2%, with the semiconductor index down 2.3% at its lowest point.
The tech sector was hit particularly hard, with major companies plummetingTesla saw its shares plunge more than 6% at one point, while Apple, part of the so-called "Magnificent Seven" tech stocks, fell 1.8% from its historic high
Advertisements
Amazon dropped 2.4%, Microsoft fell 2.2%, Google’s parent company Alphabet decreased 2.1%, Meta (formerly Facebook) fell 1.5%, and Nvidia saw a significant drop close to 3%. The Roundhill Magnificent Seven ETF, which tracks these prominent tech stocks, also suffered, plummeting 3.3% to a weekly low.
The sell-off was not limited to tech stocks aloneApproximately 412 of the S&P 500 index components saw declines, with the technology sector down 1.8%, followed closely by the 1.6% drop in the consumer discretionary sector and a 1.2% dip in communications servicesConversely, the energy sector managed to rise, benefiting from the uptrend in oil prices even amidst the overall market decline.
Market analysts noted that there were no significant economic news or data to drive drastic movements in the markets on FridayThis was compounded by the fact that European markets were returning after a two-day holiday, leading to a generally quiet trading atmosphere as the year turned towards its close, which highlighted the volatility of recently acquired semiconductor and large tech stocks.
Meanwhile, the yield on the benchmark 10-year U.S
Advertisements
Treasury bond hovered at a seven-month high, intensifying the downward pressure on equitiesThe daily newsletter, The Sevens Report, highlighted insights from editor Tom Essaye, who pointed out that a lack of major news or data meant that the 10-year Treasury yield, a key benchmark for asset pricing, would significantly impact stock prices; higher yields typically lead to greater pressure on equities.
Paul Hickey, a co-founder of Bespoke Investment Group, echoed this sentiment, emphasizing the potential problems posed by the 10-year Treasury yield breaching the 4.60% level, a mark not seen since AprilThis kind of upward movement in yields, he suggested, could create further challenges for the stock market.
On Friday, the trajectory of bond yields presented a mixed scenario—yield on shorter-duration bonds fell, while the 10-year Treasury yield rose, briefly hitting 4.62%, close to the previously established seven-month peak of 4.64%. This steepening of the yield curve indicates market anxieties about future inflation and interest rate dynamics.
David Kruk, head of trading at La Financiere de L’Echiquier in France, indicated that one of the most crucial trends at year-end is indeed the rise of the 10-year Treasury yield
Advertisements
He suggested that, “This shows that everyone is waiting for the January data regarding inflationMost of the trading activity now appears to be technical, driven by short-covering and profit-taking, without the larger trends we typically see at this time of year."
Further, some analysts noted fears related to the resilience of the U.Seconomy, with trepidations that tariff and tax policies could spur price increases, thereby pushing the Federal Reserve towards a more hawkish stanceInvestors were also keeping a watchful eye on employment and inflation data set to be released mid-January, which could potentially disrupt Federal Reserve plans.
Currently, traders are betting that the Federal Reserve will lower interest rates less than twice by the end of 2025. Since the Federal Open Market Committee (FOMC) meeting on December 17, yields on bonds ranging from 5 to 30 years have collectively jumped by more than 15 basis points
- Rising Mortgage Rates in the U.S.
- Large Industrial Firms See Performance Gains
- Surge in Quantum Computing Stocks
- US Holiday Retail Sales Surge Nearly 4%
- City Acceleration Beyond the Esports Arena
By the end of Thursday, the Bloomberg U.STreasury Index had shown a decline of 1.7% in December, reducing its annual gain to below 0.5%.
Goldman Sachs, among other major investment banks, has highlighted the pressure on market liquidity and the technical factors related to pension funds reallocating between stocks and bonds as year-end approachesThis situation is predicted to exacerbate short-term market sell-offs and volatility.
Next week, traders will scrutinize the repurchase markets to see if any signs of the short-term funding pressure that emerged at the end of the third quarter will reappearGoldman’s trading desk predicts that U.Spension funds will unload $21 billion worth of equities while simultaneously purchasing an equal amount in bonds by the end of the month, after a prior rebalancing projection that once reached $30 billion before the slight sell-off witnessed on Wednesday.
In calculations reflecting the absolute dollar values of all buy and sell transactions over the past three years, the anticipated $21 billion in equities to be sold is positioned in the 86th percentile for high amounts and significant selling pressure dating back to January 2000, which seemingly provides context for the unusual magnitude of the market sell-off.
Moreover, Goldman noted early in the week that the S&P's declines spurred by the Fed's "hawkish rate cut" had prompted some commodity trading advisors (CTAs) to offload positions with nearly $7.5 billion in sales over the last five days, with expectations of another $4 billion in sales to follow; however, the market for CTA sell-offs appears to have largely passed.
Despite the recent fluctuations, a majority of analysts on Wall Street maintain an optimistic outlook for U.S
equities in the coming year, downplaying the short-term impact of recent volatilityCiti’s equity strategist Scott Chronert continues to see robust potential in equities and believes the recent market downturn is unlikely to deter long-term investment strategiesHe remarked, “Overall, this environment, combined with a sustained period without a meaningful market correction, indeed makes the market more susceptible to intensified volatilityYet, provided the fundamental conditions hold steady, we would be inclined to take advantage of any pullbacks in the S&P 500 in the first half of next year.”
Tom Essaye noted that despite the market's recent drop causing some waning excitement among retail investors, professional market sentiments remain unchanged“Market sentiment has shifted away from excessive optimismOrdinary investors, as we approach the new year, will likely have a more balanced outlook on the market, which is a positive development as it reduces the risk of stock market bubbles.”
However, he warns that adverse political developments or indications from Fed officials regarding a ‘pause’ in rate cuts could trigger further short-term volatility and sell-offs on Wall Street.
John Higgins, chief market economist at Capital Economics, reaffirmed a positive projection for the S&P 500, estimating it could gain an additional 16% by 2025, potentially nearing the 7000-point mark by the end of next year