The US stock market endured a steep decline on Friday, with the S&P 500 logging its worst day since December 18th. A stronger-than-expected jobs report dashed investor hopes for imminent Federal Reserve interest rate cuts, fueling concerns over inflation and higher borrowing costs.
Key Economic Data: Robust Jobs and Surging Yields
- Employment Growth: The Labor Department reported a surge in US job creation for December, far exceeding expectations, while the unemployment rate remained near historic lows.
- Inflation Fears: This robust data raised concerns about persistent inflation, prompting fears that the Fed may need to maintain a restrictive monetary policy for longer.
- Treasury Yields Soar: The 10-year Treasury yield spiked, briefly surpassing 5%, reflecting market expectations of fewer or delayed Fed rate cuts.
Sector Performance: Broad Market Declines
Stocks fell broadly across sectors, with small-cap stocks and growth stocks hit particularly hard. The rise in yields added pressure to equities, particularly as corporate earnings growth is expected to slow in the coming months.
What’s Ahead: Inflation Data and Earnings Season
Investors are now focusing on next week’s critical inflation data, which could heavilywill further influence the Federal Reserve’s policy outlook. Additionally, the upcoming earnings season, particularly from the financial sector, is being closely watched for indications of strength in the broader economy.
Weekly Market Performance: Declines Across the Board
For the week, all major indices posted losses:
- S&P 500: -1.9%
- Dow Jones: -1.9%
- Nasdaq Composite: -2.3%
Friday’s Closing Levels
| Index | Close | Change | %Change |
|---|---|---|---|
| Dow Jones | 41,938.45 | -696.75 | -1.63% |
| S&P 500 | 5,827.04 | -91.21 | -1.54% |
| Nasdaq | 19,161.63 | -317.25 | -1.63% |
| US 10Y Yield | 4.759% | ||
| VIX | 19.54 | +1.47 | +8.14% |
Market Analysis: Bearish Sentiment Gains Traction
Friday’s “good news” on the labor market was interpreted as “bad news” for stocks. Strong employment data was seen as inflationary, driving bond yields higher and pushing equities lower.
- Small-Cap Correction: Small caps stocks are now 10% below their recent highs, signaling a correction phase.
- Technical Signals: The S&P closed near its 100-day moving average, while the Nasdaq 100 dropped below its 50-day moving average but remain above its 100-day MA.
Outlook: Rebound or Prolonged Selloff?
- Bearish Risks: Further price deterioration could trigger a prolonged selloff, especially if technical levels fail to hold.
- Bullish Hopes: However, a rebound off Friday’s lows could invite dip buyers to defend the bull run. Expect short-sellers to test any rallies, making for a volatile trading environment.
Focus on Inflation
With the labor market showing resilience, inflation is now the primary focus for both the Fed and investors. Next week’s inflation indicators will be pivotal in shaping the market’s direction.
Final Thoughts
While the market has shown resilience after recent periods of weakness, it may take more short-term pain before recovery gains traction. Trade cautiously and be prepared for increased volatility as inflation concerns and Fed policy remain at the forefront.
Source: CBOE, Bloomberg
This commentary was written by James Gomes, a seasoned finance professional with over 30 years of industry experience, including a tenure exceeding 20 years at a prominent US bank.
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