Stocks rally loses steam while Treasuries power on
High-flying stocks reversed course Wednesday after Wall Street warned of a pullback on the rally ignited by the Federal Reserve’s pivot last week.
The Nasdaq 100 ended the day down 1.5% as the tech-heavy benchmark drew back from its latest all-time high. The S&P 500 fell at a similar pace.
Relative strength readings on the gauges had been trading at levels typically seen before a decline. Wall Street’s fear gauge – the VIX – also rose sharply, it has been trading near multi-year lows.
“It certainly looks like it has become very one-sided, and it is a scary world when everybody gets on one side of the boat,” Cameron Dawson, chief investment officer of Newedge Wealth, told Bloomberg Television.
“The market is very extended, we do see it being very overbought. But we’re in this melt-up period and so oftentimes things can get even sillier before they really do have a pullback.”
Treasuries powered ahead with the yield on the policy-sensitive two-year notching an eight basis point move, the 10-year rate fell to 3.9%.
British 10-year debt led the global bond rally following data showing a slowdown in UK inflation.
Traders digested data showing U.S. consumer confidence in December rose by the most since early 2021 on Wednesday.
The second-straight monthly increase showed Americans were less concerned about a recession, but economists are still keeping a wary eye on the jobs market.
“While a sustained improvement in confidence would be a positive signal about consumer attitudes and spending, a loosening in labor market conditions owing to a restrictive policy stance is likely to weigh on demand, consumption and growth going forward,” Rubeela Farooqi at High Frequency Economics wrote.
Separately, sales of previously owned US homes edged higher in November off of a 13-year low, according to a National Association of Realtors report, earlier data showed mortgage rates fell to their lowest since June.
Expect more strength next year as the labor market remains solid and conviction about Federal Reserve rate cuts rises, according to some of Wall Street’s biggest bulls heading into 2023.
Fundstrat Global Advisors LLC’s Tom Lee, who came closest to predicting the trajectory of the S&P 500 for this year among strategists tracked by Bloomberg, sees the benchmark hitting 5,200 in 2024.
But others remain wary of the persistent rally.
“Let’s just enjoy the calm right now,” Jim Caron, portfolio solutions CIO at Morgan Stanley Investment Management, told Bloomberg Television. “It’s going to get a lot rockier and a lot more uncertain into the future.”
Diminishing profits from FedEx Corp., widely seen as a bellwether for U.S. economic outlook, heightened concerns about an economic slump.
The delivery company’s shares dropped 12% in New York trading.
Investors are also starting to weigh risks stemming from potential shipping delays and freight cost increases, as companies divert cargoes away from the Red Sea to avoid militant attacks.
This rerouting will mean higher shipping costs and longer delivery time, Bloomberg Economics wrote in a note.
The focus now turns to upcoming data readouts, including Thursday’s GDP print and Friday’s data on personal consumption expenditures – the Fed’s preferred inflation gauge.
In commodities, crude oil fell below $75 a barrel, while gold tumbled.