Congress, PMI Data On Tap After 5-Day Stock Skid
Schwab Market Update Audio
Deep Dive
Why is the S&P 500 on a five-day losing streak?
The S&P 500 is on a five-day losing streak due to a combination of factors, including rising Treasury yields, a strong U.S. dollar hitting two-year highs, and surging crude oil prices. Additionally, encouraging jobless claims data caused Treasury yields to tick higher, which further pressured stocks. The index has struggled to maintain bullish momentum, with support at the 50-day simple moving average failing to hold in December.
What impact does a strong U.S. dollar have on the stock market?
A strong U.S. dollar can introduce volatility into the stock market, particularly for multinational companies, as it impacts their earnings. While a higher dollar isn't inherently bad, its rapid ascent can create uncertainty. This is because a strong dollar makes U.S. exports more expensive and reduces the value of overseas earnings when converted back to dollars.
What does the rise in the VIX indicate about market sentiment?
The rise in the VIX, which climbed 9% to test the pivotal 20 level before settling around 18, indicates increased market uncertainty. Volatility has been volatile itself lately, and VIX futures suggest that volatility may continue to rise in the coming months, reflecting investor nervousness about the market's direction.
What are the key factors driving crude oil prices higher?
Crude oil prices surged to two-month peaks due to U.S. economic strength, geopolitical factors such as the ongoing wars in Ukraine and the Middle East, and hopes for a recovery in China. These factors, along with some short covering, have supported oil prices despite expectations that supply growth will outpace demand growth in 2025.
What does the December ISM Manufacturing PMI data reveal about the U.S. economy?
The December ISM Manufacturing PMI is expected to come in at 48.5%, slightly up from 48.4% in November but still below the 50% threshold that indicates expansion. This suggests that the U.S. manufacturing sector remains weak, a trend that has persisted for over a year.
Why did Tesla's stock struggle despite a rebound in mega-cap stocks?
Tesla's stock struggled after reporting fourth-quarter deliveries of 495,000 vehicles, which fell short of Wall Street's expectation of 510,000. The company has faced challenges from cheap gasoline, competition from Chinese EV manufacturers, and the growing popularity of hybrid vehicles. These factors contributed to the pressure on Tesla and other mega-cap stocks.
What is the significance of the 10-year U.S. Treasury note yield rising to 4.58%?
The 10-year U.S. Treasury note yield rising to 4.58% reflects market expectations that the Federal Reserve may keep interest rates higher for longer. This rise in yields, combined with a strong dollar and rising oil prices, creates a challenging environment for stocks, as it increases borrowing costs and reduces the attractiveness of equities relative to bonds.
What are the potential implications of the new Congress being sworn in?
The swearing in of a new Congress and the election of a House speaker could introduce political uncertainty, which may exacerbate market volatility. Investors will be watching for any policy changes or gridlock that could impact economic growth, fiscal policy, or market sentiment.
- Five-day losing streak for S&P 500
- Stronger US dollar and rising oil prices
- Weakening bullish momentum, but technically still in an uptrend
Shownotes Transcript
Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Colette O'Clare, and here is Schwab's early look at the markets for Friday, January 3rd. Wall Street's retreat from December's record highs spilled into the new year Thursday, and pressure points persist as the last trading day of the holiday stretch looms.
Stocks got an early boost yesterday from falling Treasury yields, but ominously the U.S. dollar hit two-year highs and crude oil prices surged to two-month peaks. Then Treasury yields ticked higher on encouraging jobless claims data, and Wall Street's rally quickly faded into the fifth straight losing session for the S&P 500 index, or the SPX.
The relatively quick ascent of the dollar hasn't negatively impacted U.S. stocks yet, but this may be something to monitor in the coming weeks, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. A higher dollar isn't necessarily bad, but if the velocity is too quick, this can introduce some volatility since a strong dollar does impact earnings from multinationals.
Volatility, as measured by the SIBO Volatility Index of the VIX, climbed 9% at one point Thursday to test the pivotal 20 level before dipping by the end of the day to around 18. That's from under 15 before the holidays. Volatility itself has been volatile lately, typically a sign of market uncertainty, and VIX futures indicate rising volatility in coming months.
The triple burden of seven-month highs in yields, the greenback, and oil, accompanied by increasing VIX, is a tough pill for Wall Street to swallow. The strong dollar and rising yields reflect ideas that the Federal Reserve might keep rates higher for longer, which it hinted at after the December meeting.
Technically, we're still in an uptrend, but the bullish momentum has been waning, Peterson said. The SPX support at the 50-day simple moving average didn't hold in December.
A late rebound yesterday helped prevent a complete washout and may indicate some buying interest below the market, especially after the S&P 500 hit its post-election intraday low yesterday below 5,830. It's unclear if the solid closing performance could spill into Friday's action, but recent rallies have quickly met sellers.
Today brings December ISM manufacturing PMI, which analysts see at 48.5%. That's up slightly from 48.4% in November, but still under the 50% level needed to denote expansion.
Manufacturing has been weak for more than a year, possibly one reason materials were the only S&P 500 sector to fall in 2024. Unless commodity prices recover, materials could remain burdened, but weak economies in China and Europe hint that commodities may remain challenged.
The exception for now is crude oil, which broke higher to start the year despite supply growth expected to outpace demand growth in 2025. U.S. economic strength could be lifting crude, as well as geopolitical factors, including continued war in the Ukraine and Middle East. Hopes for a recovery in China also underpinned oil yesterday, perhaps bringing some short covering into play.
Weekly initial jobless claims slid to 211,000 near recent lows and below the briefing.com consensus of 224,000. Continuing claims fell to 1.844 million, below a three-year high near 1.9 million last time out. Thursday's lighter continuing claims reading supported Treasury yields and could reinforce ideas that the Federal Reserve will move cautiously on rate cuts.
As of late Thursday, futures trading built in nearly 90% chances of a January rate pause, according to the CME FedWatch tool. Today could see thin holiday volume that exacerbates market moves, but also features the distraction of events in Washington, D.C., when a new Congress gets sworn in and the House chooses a speaker.
MegaCaps initially rebounded Thursday after slipping in late 2024, but soon slammed the brakes after Tesla reported fourth-quarter deliveries of 495,000, shy of the 510,000 that Wall Street had expected. Tesla has been hurt in part by cheap gasoline, competition from Chinese EV companies, and the growing popularity of hybrid vehicles.
Tesla's weakness and selling in Apple on worries about iPhone demand kept up the recent pressure on mega caps with 2025 underway. One possible factor behind the selling could be ideas that investors might decide to take profit on their 2024 winners in the new year, hoping for better tax treatment. However, it's possible some of that weakness represented front-running in which investors try to get ahead of a perceived weakness.
trend. If that's the case, part of the damage may already be in the market, so to speak.
Thursday saw the same sector trend as late last year, with 2024 winners including Consumer Discretionary and Infotech in the red, even as Energy and Healthcare, which both trailed the broader market last year, placed in the top five daily performers. Tesla's struggle hurt the Consumer Discretionary sector Thursday. There's been some duck shuffling recently, but low volume this holiday season makes it unclear if it's a trend with much conviction.
The SPX dropped 13.08 points or 0.22% Thursday to 5,868.55. The Dow Jones Industrial Average lost 151.95 points or 0.36% to 42,000.
392.27. And the Nasdaq Composite gave back 30 points or 0.16% to 19,280.79. The 10-year U.S. Treasury note yield added one basis point to 4.58% after an early drop below 4.52%. This has been the Schwab Market Update Podcast.
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