(Bloomberg) — Wall Street’s final session of 2023 saw stocks taking a breather after a rally that put the market on pace for its ninth straight week of gains — the longest winning streak since 2004.
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Signs of exhaustion have emerged after major equity benchmarks traded near or at all-time highs, spurring warnings about a pause or pullback. That’s after this year’s great cross-asset surge that has defied every major concern ranging from Federal Reserve uncertainty, recession anxiety and geopolitical risks.
“The market shows signs of fatigue and undoubtedly needs to consolidate,” said Quincy Krosby at LPL Financial. “As long as participation remains broad, the bullish sentiment should carry the indexes as they navigate geopolitical and domestic scenarios, and an overarching positive consensus that 2024 will be a similarly strong year.”
The S&P 500 fell after approaching its January 2022 record of 4,796.56. Fueled by the artificial-intelligence boom, stretched positioning and the “fear of missing out,” the gauge has climbed about 25% in 2023, while the Nasdaq 100 is still headed for its best year since the dot-com era.
Treasuries wavered after positing solid gains in recent weeks. The recommended close for dollar-denominated cash bonds is 2 p.m. New York time. The greenback was poised for its worst year since the onset of the pandemic. Oil headed for the biggest annual drop since 2020.
Key inflation data endorsing a growing narrative that central bankers will aggressively ease monetary policy in 2024 have fueled solid gains for both equities and bonds over the last two months. The rally has also been fueled by Fed Chair Jerome Powell’s dovish pivot at the December policy meeting.
“The notion that the major central banks have surely done enough to quell the inflationary surge of 2022-23 is powering the rally,” said Brian Barish, chief investment officer of Cambiar Investors LLC. “It’s not hard to imagine new things for the markets to be concerned by, such as elections, the sizable bond funding requirements of the US government, and/or any notion that inflation resurges anew. But for now, there’s not much news and not a lot of sellers.”
The lack of anxiety is also visible in the market’s favorite volatility gauge — the VIX — which has held below 13 this week, near pre-pandemic lows set earlier this month and well below the five-year average.
That low VIX reading “could be suggestive of a degree of investor complacency, even exuberance,” said Russ Mould, investment director at AJ Bell.
Equity markets have gone up so quickly that they’re highly vulnerable to a pullback if the US economy slips into even a mild recession, according to Royal Bank of Canada’s fund management arm.
The odds of such a downturn are still about 70%, says the chief economist of RBC Global Asset Management. Rate cuts are likely to happen in 2024, but the global economy hasn’t yet absorbed the full impact of almost two years of tightening, RBC economist Eric Lascelles said.
“What’s baked into the cake is a sizable jump in earnings, which is really only achievable in a soft-landing scenario,” Lascelles said.
While concerns about an overstretched market linger, consolidation can help alleviate overbought conditions — and aggressive pullbacks are not always a requirement, according to Craig Johnson at Piper Sandler.
“We expect pullbacks to be mild as investors follow the current status quo into the new year,” Johnson noted.
Aside from watching whether the S&P 500 will hit a record high, investors are also waiting to see whether the stock market can continue to power ahead after the string of gains over the past few weeks.
To Adam Turnquist at LPL Financial, while extremely overbought conditions raise the odds of a temporary pause or pullback, longer-term returns have been positive and above average based on comparable periods.
Following a nine-week winning streak, the S&P 500 has posted average and median 12-month forward returns of 8.1% and 12.2%, respectively, Turnquist said, citing data going back to 1950. Seven out of nine occurrences produced positive results, he noted.
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.4% as of 11:15 a.m. New York time
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The Nasdaq 100 fell 0.6%
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The Dow Jones Industrial Average fell 0.2%
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The Stoxx Europe 600 rose 0.2%
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The MSCI World index fell 0.3%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.1051
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The British pound was little changed at $1.2736
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The Japanese yen rose 0.3% to 140.96 per dollar
Cryptocurrencies
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Bitcoin fell 0.7% to $42,181.24
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Ether fell 1.3% to $2,315.4
Bonds
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The yield on 10-year Treasuries was little changed at 3.85%
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Germany’s 10-year yield advanced eight basis points to 2.02%
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Britain’s 10-year yield advanced four basis points to 3.54%
Commodities
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Matthew Burgess, Joanna Ossinger, Divya Patil, Robert Brand and Elena Popina.
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