Wall Street’s major indexes closed virtually unchanged on Thursday, December 28th, following the Christmas holiday. Light trading volume and rising Treasury yields limited equity gains, while investors anticipated a potential year-end “Santa Claus rally.”
The yield on the benchmark 10-year Treasury note briefly reached its highest point since early May at 4.64% before settling slightly lower at 4.58%. Rising yields typically exert downward pressure on growth stocks, as they increase borrowing costs for expansion. Given the significant influence of megacap technology companies, often referred to as the “Magnificent Seven,” on market performance, their sensitivity to yield fluctuations can impact broader indexes, especially in the absence of other market catalysts.
Six of the seven megacap stocks traded in negative territory, with Tesla leading the decline at 2.1%. Amazon.com and Meta Platforms also experienced dips of 0.6% and 0.7%, respectively. George Cipolloni, portfolio manager at Penn Mutual Asset Management, noted the pivotal role of the 10-year Treasury yield, stating, “Any move higher and it tends to create equity market weakness.”
At the closing bell, the S&P 500 edged down 0.04% to 6,037.52, while the Nasdaq Composite slipped 0.02% to 20,026.21. The Dow Jones Industrial Average managed a marginal gain of 0.01%, reaching 43,301.76. European and Asian markets remained closed for the holiday.
2023 Outlook: Interest Rates and Economic Data
Throughout 2023, the three major indexes achieved numerous record highs, fueled by optimism surrounding a lower interest rate environment and the potential for artificial intelligence to drive corporate profits. However, the market’s upward trajectory encountered resistance in December, as investors digested the Federal Reserve’s projection of fewer interest rate cuts in 2025.
Recent economic data indicated a slight decrease in new jobless claims, suggesting a cooling yet robust labor market. Joe Tigay, portfolio manager of the Rational Equity Armor Fund, commented on the positive outlook for markets in the coming year, contingent on continued economic strength: “We have come off of high interest rate policy and there’s a good chance we’ll still be cutting (rates) more. For the next year, it should be a positive outlook (for markets), unless we see signs the data is softening.”
Santa Claus Rally Expectations
Market participants are currently focused on the “Santa Claus rally,” a historically strong period for equities attributed to factors such as low liquidity, tax-loss harvesting, and the investment of year-end bonuses. According to the Stock Trader’s Almanac, the S&P 500 has averaged a 1.3% gain during the last five trading days of December and the first two of January since 1969. Both the Dow Jones Industrial Average and Nasdaq Composite are currently on four-session winning streaks, while the S&P 500 has closed higher for three consecutive sessions.
Cryptocurrency-related stocks experienced declines following a 3.9% drop in Bitcoin’s price. MicroStrategy fell 3.7%, MARA Holdings slipped 2.5%, and Coinbase Global was down 2.1%.
Most S&P sectors traded lower, with consumer discretionary leading the decline at 0.6%. The energy index also dipped 0.4%, mirroring a slight weakening in U.S. crude oil prices.
In conclusion, Thursday’s trading session reflected a period of consolidation on Wall Street, with rising Treasury yields offsetting potential gains. Investors remain watchful for signs of a year-end rally and continue to assess the interplay between interest rates, economic data, and market performance.
