Market hangover

The sharp rally in November and December made markets feel like popping champagne corks, but too much of a good thing often turns out to be unpleasant.

Stock and bond markets woke up to losses in the first week of the year, as it appears they had been too enthusiastic toward year-end. After ranging between 3.31% and 4.99% in 2023, and finishing the year where it started, unchanged at a yield of 3.88%, the 10-year Treasury yield marched steadily higher last week, closing at 4.00% before falling slightly at week’s end. The S&P 500 index fell about 1% for the week.

The market’s optimism is based on the change in the Federal Reserve’s outlook at its December meeting and rising confidence that the Fed can pull off a soft economic landing, with slowing growth and still-solid jobs market. Economic data released last week seemed to support this view: manufacturing activity improved, weekly jobless claims fell and monthly jobs added increased by 216,000 in December, though the prior two months were revised lower by 71,000. The unemployment rate was stable, at 3.7%, and average hourly earnings rose from 4.0% to 4.1% over the last year. The only nick in the armor was the weaker services index, which showed lower prices paid, but also lower employment. This could be an indication of companies trying to reduce cost, or difficulty in staffing in the ongoing hybrid work economy. Next week brings updated information about inflation and the start of fourth quarter corporate earnings season.