The S&P 500 fell Monday from the highest since March 2022, while the Nasdaq 100 dropped 1% amid a decline in megacaps. US two-year yields slipped one basis point on Tuesday after jumping 10 basis points the previous day.
“The biggest near-term risk for the markets could simply be that after a phenomenal one-month rally, a period of consolidation may be a necessary breather,” said Jason Draho at UBS Global Wealth Management. “A lot of good news is priced in.”
A slew of key jobs readings over the next few days will be closely watched for clues on the Fed’s next steps — and the figures may reignite volatility in the market.
For Morgan Stanley’s Michael Wilson, US stocks are set for a rocky end to the year. The strategist said December may bring “near-term volatility in both rates and equities” before more constructive seasonal trends as well as the “January effect” support equities next month. JPMorgan Chase & Co.’s Mislav Matejka said markets expecting a soft landing leave no room for error.
“Perhaps one should be contrarian yet again,” Matejka said.
Whether the economy settles in for a soft landing or spirals into something worse, both scenarios suggest lower rates are coming. That revives the risk that investors will get burned again should Fed Chair Jerome Powell deliver the sort of hawkish surprises that punctuated 2023.
Markets on Friday brushed off Powell’s comments that it was “premature” to show confidence rate hikes are over and speculate that cuts are coming. But Monday’s reversals highlight that recent rallies make investors vulnerable should the Fed fail to validate the market’s expectations.
“We had a massive increase in interest rates that just haven’t totally hit the economy yet,” said Dana D’Auria at Envestnet Inc. “The market has a decent chance of slowing down next year. Does it mean it’s a massive crash? No, not necessarily. But I don’t advocate chasing after stocks and not being balanced in the way that you go to the market.”
This article was provided by Bloomberg News.