US blue-chip stocks have broken a nine-week bull run for one of their worst starts to the year in a decade, as investors lurch between hopes of interest rate cuts and fears that a buoyant economy will delay any monetary easing.
The S&P 500 index closed up 0.2 per cent on Friday but managed a loss of 1.5 per cent over the shortened four-day trading week to begin 2024. The benchmark swung sharply over the trading session, dropping early after the release of strong employment data and then reviving on weak service sector figures from the Institute for Supply Management, which renewed hopes that a slowing US economy would encourage the Federal Reserve to cut interest rates sooner than anticipated.
Sonal Desai, chief investment officer for Franklin Templeton Fixed Income, said: “We’re back in a situation where good news will be bad and bad news will be good. We saw that with the move on the jobs figures and then the retracement on ISM services.” Blue-chips’ losses for the week represent an abrupt change in mood from December, when the S&P closed out a nine-week bull run — a feat not managed since 2004 — to finish 2023 within a whisker of a new all-time high.
Analysts tend to gauge early-year performance over five days — which will include next Monday — since the first week of any year’s trading is rarely a full one. “The first five days of the year are stock almanac legend — how they go, so goes the year,” said Bob Savage, head of markets strategy and insights at BNY Mellon.
“It’s correlated enough to the rest of the year to pay attention to, but not to bet the farm on.” If the S&P 500 falls for its first five days, its average full-year gain is 1.1 per cent, compared with 11.2 per cent if it gains over the same period, according to strategists at Deutsche Bank. Should the benchmark end January in negative territory, on average it loses 0.7 per cent over the year.
Yields on benchmark 10-year US Treasury notes closed the week at 4.05 per cent, having swung on Friday between a three-week peak of 4.10 per cent soon after the jobs data release and a low of 3.95 per cent. Since the Fed last month signalled a likely end to its rate raising cycle, investors have interpreted weaker numbers as a sign that rate cuts may come soon.
But hawkish comments this week and the strong jobs data has worried market participants that rates could stay higher for longer than they had hoped. The minutes of the central bank’s last meeting, published on Wednesday, painted a more hawkish picture than many had hoped for. Federal-funds futures contracts are currently pricing in about a two-thirds chance of the first interest rate cut coming in March.
In December, the probability was about 90 per cent. “Some pullback in the market is healthy,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “I think the market is ahead of the Fed on rate cuts — I don’t think the Fed is cutting in March.” While the central bank’s rate-setters have forecast three quarter-point rate cuts over the next 12 months, markets have priced in at least five. In Europe, the region-wide Stoxx Europe 600 recovered from losses of about 1 per cent to close 0.3 per cent lower and down 0.5 per cent for the week.
Earlier, closely watched eurozone inflation numbers came in slightly below expectations. Markets are now pricing in a less than 50 per cent probability of a first rate cut in March by the European Central Bank, down from about 65 per cent last week. Investors have also dialled down their expectations of cuts from the Bank of England.