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Wall Street’s longest weekly winning streak in nearly two decades ended on Friday as stock investors’ celebration of slowing inflation and the possibility of lower interest rates gave way to caution over remaining risks to the economy. .
The S&P 500 Index ended the week down 1.52%. It was the first weekly decline after nine consecutive weeks of gains, and the market’s longest winning streak since January 2004. The Nasdaq Composite Index, chock-full of tech stocks that soared in 2023, has fallen a little each day since Dec. 28, to 5.5%. Intraday losses have not been seen since October 2022.
Analysts and investors said that for now, the move only signals a gradual downturn, rather than the beginning of a deeper one. Investor’s unbridled optimism has pushed the S&P 500 index up about 14% in the last two months of the year, bringing it within striking distance of new highs.
Along with warnings that stock market valuations have risen too quickly, there is also a reassessment of when the Federal Reserve will start cutting interest rates, which could boost stock prices, corporate profits, and consumer spending. buoyed investors’ newfound calm. Heading into the end of 2023, investors were betting on interest rate cuts to begin as early as March.
“The market is getting a little ahead of itself,” said State Street macro strategist Kayla Seder, noting the risk that slowing inflation could still change course. “There was a very optimistic mood heading into the end of the year,” she said.
Minutes from the Fed’s last December meeting released on Wednesday confirmed the view that the central bank’s stance has changed, with policymakers acknowledging that slowing inflation likely means a halt to further rate hikes. Ta. But the minutes suggested policymakers intend to keep raising rates until they are confident inflation is under control, putting pressure on bets for rate cuts in coming months. This in turn weighed on stock prices.
New figures on Friday showed the labor market remained strong in December, reinforcing confidence in the economy’s resilience, but also warning that inflation could still flare up as wages continue to rise. It also raised concerns. The S&P 500 ended the day up about 0.18%, but not enough to reverse losses from earlier in the week.
The early decline marked the S&P 500’s worst start to the year since 2015, but analysts cautioned against drawing any strong conclusions after just four days of trading.
Many of the stocks that pushed the market higher last year are anchors that will weigh on the market in 2024. The so-called “Magnificent Seven” stocks, which include the market’s biggest companies with the greatest impact on returns, were all the worst performers this week.
Apple, Amazon, Microsoft, Nvidia, Tesla, Alphabet (Google’s parent company), and Meta (Facebook’s parent company) have collectively accounted for nearly 70% of the S&P 500 index’s decline since January 2nd. Without these companies, the index would have fallen by less than 1. percent.
Apple has fallen about 6% since last Friday, with continued declines after two analysts downgraded their outlook for the company, citing declining iPhone sales as contributing to the decline in revenue. are under great pressure.
Some analysts believe the stock price could fall further. Investors have softened their bets on a rate cut in March, but still expect a gradual economic slowdown to give the Fed permission to cut borrowing costs by the central bank by the end of July by 0.75 percentage points. There is. For the whole of 2024 he is predicted in December.
If the economy turns out to be stronger than expected, the central bank is likely to keep interest rates unchanged for an extended period of time, disappointing investors. A sharp deterioration in the health of the economy could prompt a rate cut, but the reasons for that are even more concerning.
“It’s totally Goldilocks,” said George Goncalves, chief macro strategist at MUFG Securities. “That doesn’t suit me.”
Rising long-term borrowing costs, supported by interest rates paid on government bonds, are also making stock investors nervous, as the 10-year government bond yield fell by about 1 percentage point to about 4% due to an astonishing rise at the end of last year. there is a possibility. . Some bond traders surveyed by JPMorgan are betting some of those moves will reverse this week, with Friday’s jobs report already helping push yields higher.
“One of the big risks of leaning into a Fed rescue rally is that investors typically find out a few months later that the Fed is backing away from its rate-hiking policy because growth is slowing.” This tends to be “not constructive,” New York Life Investments economist Lauren Goodwin said of the stock market.
But for many analysts, it makes sense for the market to pull back a bit after its torrid rally at the end of 2023, and most stock market prognosticators still expect the S&P 500 to rise over the next year.
Roger Arriaga Diaz, an economist at Vanguard, said the balance of risk tilts toward a “rosy scenario,” while “in our view, it ignores all the risks that still exist.”
“We are not out of the woods when it comes to inflation,” he warned.
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