How the 2023 ‘everything rally’ is unwinding in the new year

Popular trades from the fourth quarter of 2023, like long U.S. stocks, simply might have moved too far, too fast. And with many investors waiting until after the new year to take gains for tax purposes, the selloff in stocks doesn’t seem as surprising.

“I wouldn’t read too much into the first couple of days of weakness. Rallies like the one we had in the last two months of the year don’t come around very often, but unfortunately they don’t last forever,” said Paul Hickey, an analyst at Bespoke Investment Group in an email exchange with MarketWatch. 

“It’s been a short trading week. Investors were reluctant to take profits before year end, and now they can. Call us back in a week or so when earnings season starts.”

Still, early signs of an unwind of last year’s rally haven’t been limited to stocks. Some maintain that investors may be broadly rethinking aggressive expectations for Federal Reserve interest-rate cuts.

That could mean the weakness in markets in the year’s first week could be the start of a bigger reversal. Here is how the U.S. dollar, U.S. stocks, Treasurys, gold and oil prices were affected in the past week.

U.S. stocks

The S&P 500 index
SPX,
Nasdaq Composite Index
COMP
and Dow Jones Industrial Average
DJIA
each fell to start 2024, snapping a nine-week winning stretch for stocks.

What’s more, the S&P 500’s 1.5% retreat over the first four trading days of 2024 marked its worst start since 2016 when it fell 4.9%. It also put an end to its longest stretch of weekly gains in nearly 20 years, according to Dow Jones Market Data.

Treasurys

Treasury yields jerked higher in the new year, with the yield on the 10-year note increasing to 4.041% on Friday, cementing a climb of 18.1 basis points in four days, its biggest weekly advance since Oct. 20, Dow Jones Market Data show.

For the 2-year yield
BX:TMUBMUSD02Y,
it was the biggest weekly advance in a month. It snapped a three-week streak of falling yields.

Treasury yields, which move inversely to prices, have fallen sharply from their peak. The 10-year yield
BX:TMUBMUSD10Y
is down 94.6 basis points from its 52-week high of 4.987% from Oct. 19, Dow Jones data show.

U.S. dollar

The ICE U.S. Dollar Index
DXY,
a gauge of the buck’s strength against a basket of rivals, rose 1.1% to 102.3 in the past week.

The U.S. dollar, which lately has tended to trade inversely to stocks and other risk assets, also posted its best first week of a year since 2015, Dow Jones Market Data show.

See: King dollar makes a comeback: Buck on track for best start to a year in nearly a decade

Gold

After shooting higher late last year, propelled by hopes for interest-rate cuts and a weaker U.S. dollar, gold started 2024 on the backfoot.

Front-month gold
GC00,
+1.70%
ended the week down 1% at roughly $2,050 an ounce on Comex. It was the yellow metal’s worst week in a month, and the end of a three-week winning streak.

Gold prices hit a record high north of $2,150 an ounce in December, as MarketWatch reported.

See: Gold still outshining stocks and bonds since the turn of the century

Crude oil

Oil prices seemingly couldn’t find a floor in December. Now, they’re starting the new year back with a notable spike, driven by escalating tensions in the Middle East.

Front-month futures contracts for West Texas Intermediate crude, the U.S. benchmark, ended the week up 3%, the best week since Oct. 13, 2023, Dow Jones Market Data show.

WTI fell 21.1% in the fourth quarter and ended 2023 down 10.7%, the worst year since 2020.

Is there more to it than just markets looking ‘stretched’?

Were markets really just stretched heading into the new year after a historic rally for stocks?

There could be more to the story. The Fed has penciled in three cuts, and minutes from the central bank’s December meeting showed that senior officials weren’t certain about the timing of any potential cuts, and still haven’t taken more hikes off the table should inflation reaccelerate.

But even before the Fed’s December meeting minutes were released earlier this week, investors had already gotten ahead of themselves, said Victor Cossel, senior analyst of macro strategy at Seaport Research Partners, in emailed commentary.

“Even with Powell’s December pivot, the market’s rate cut expectations were well ahead of the Fed dots and some of that gap closed a bit this week with the market marginally repricing its rate cut expectations,” Cossel said. Fed “dots” refer to the central bank’s forecast for the path of rates, which often differs from actual interest rates.

Jake Jolly, head of investment analysis at BNY Mellon Asset Management, said U.S. stocks and bonds could be vulnerable to any economic data that might impact the Fed’s thinking.

That has investors waiting for the first major inflation report of the year, due Jan. 11. Economists expect core CPI to have risen 0.3% in December, which would be the largest increase in months. Economic data released Friday, including a monthly report on the labor market and a report on services-sector activity, appeared to boost stocks.

Despite weekly losses, the S&P 500, Dow and Nasdaq all finished modestly higher Friday, with the S&P 500 snapping a four-day losing streak.