Stocks End Lower Again Despite Yields Falling
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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 Keith Lansford, and here's Schwab's early look at the markets for Tuesday, December 31st. First, an important note. Tomorrow, the markets are closed for the New Year's holiday. The Schwab Market Update podcast will return on Thursday, January 2nd.

The final day of the month and year looms, with market fireworks absent in an unusual late-season sell-off. The Santa Claus rally has been pretty much a no-show, though it still has a couple of days to arrive as it traditionally extends two sessions into the new year.

The S&P 500 index starts December 31st, more than 100 points and nearly 2% below where it finished in November. That puts it on pace to end down in two of the last three months, the first time that's happened since a three-month skid in late 2023.

Even so, the S&P 500 is up about 24% year-to-date and almost certainly on pace to post consecutive yearly gains of 20% or more for the first time since the late 1990s. Things are a bit better in December for the tech-heavy Nasdaq Composite, which is still up 1.3% for the month and nearly 30% for the year. The small-cap Russell 2000 index is up just under 10% year-to-date.

The recent softness on Wall Street began two weeks ago when the Federal Reserve expressed caution about future rate cuts amid sticky inflation and a fast-growing U.S. economy. At the same time, worries about tariffs and other policies put forward by the incoming Trump administration unsettled markets and helped send Treasury yields soaring, pressuring stocks.

Tomorrow, U.S. markets are closed for the New Year's holiday. Volume is probably going to be light today, which can sometimes exacerbate moves. Anyone trading actively this week might want to consider smaller-sized trades. Also, with so many investors away, any large moves up or down this week will likely be seen skeptically, with doubts about the level of conviction behind them.

On the data front Monday, November pending home sales came in at a surprisingly strong 2.2% month-over-month. Analysts had expected a 0.7% monthly increase for this leading indicator of housing market activity. Though mortgage rates stayed above 7% most of November, it appeared from the report that a climb in home availability attracted buyers.

That was the good. The ugly was the Chicago Purchasing Managers Index falling dramatically to a much lower-than-expected level of 36.9 in December from 40.2 in November. A reading below 50 denotes contraction. Looking farther ahead, Friday features the December ISM Manufacturing Index providing insight on what's been a sluggish U.S. manufacturing sector.

Tesla deliveries are the next data to watch when the EV maker reports its quarterly numbers Thursday morning. Several Wall Street analysts pegged the number at 510,000, which would be the highest in history. Tesla drove to rapid gains earlier this month before lagging the last few sessions and helping push the overall market lower with the force of its high market capitalization.

Like other mega-caps, it's run into profit-taking pressure the last few sessions, in part on worries that many investors could choose January as a time to sell their 2024 winners in an attempt to possibly take advantage of a more friendly tax environment under the new administration. That's not guaranteed, however, with Congress very closely divided and some Republicans concerned about deficits.

Technical patterns and charting get a lot of attention, though the market doesn't always behave as technicians expect. The last few sessions, however, saw the S&P 500 taking cues from the charts. For instance, Monday's sharp morning descent appeared to stall at around 5870 near the closing low registered during the sell-off that followed the December 18th Federal Reserve meeting.

The S&P 500 bounced from there only to lose strength when the index reached 5940, the 50-day moving average that had previously been seen as a support level and now might represent technical resistance.

With fundamental catalysts lacking this holiday week, technical indicators could continue to get more attention, and it wouldn't be surprising to see the S&P 500 continue to rattle around near the current trading range, where 5870 represents possible support and 5940 and then 6000 represent resistance.

On the sector front, Monday brought almost nothing but losses. Energy was the only one of 11 S&P sectors to finish near unchanged, with all others settling in the red. An unusual assembly of materials, consumer discretionary and health care were the bottom three sectors, but tech and communications services also had tough days. A moderate downturn in treasury yields helped limit losses for interest rate-sensitive sectors like staples and utilities.

Volatility climbed again Monday as stocks retreated, which could indicate concerns about more weakness ahead for stocks if the Treasury market remains under pressure. Worries mounted earlier this week after Treasury Secretary Janet Yellen warned the time is running out for Congress to extend the debt ceiling, which will be hit in mid-January.

The Treasury can use extraordinary measures to pay its bills through July or August, but any signs of failure to address that issue could raise concerns about possible default. That's never happened in U.S. history, but close calls in the recent past resulted in agencies lowering their ratings on U.S. debt, which can hurt Treasuries and force yields higher.

The 10-year Treasury note entered this week up nearly 50 basis points in less than a month, a historically blistering pace. The Treasury market has been volatile the last six months, which often puts equities on edge and can raise overall volatility. The 10-year yield topped at 4.73% last spring, bottomed near 3.6% last fall, and now is back to around 4.55%.

While higher yields partly reflect signs of improved U.S. economic growth, they can represent trouble for businesses and consumers that need to borrow money and can suppress economic activity. They also reflect worries that the December Consumer Price Index, or CPI, due the week of January 13th, might harbor another unpleasant surprise after staying above expectations the last several months.

It was in the first quarter of 2024 when CPI hit a roadblock and refused to continue the previous lower path, raising concerns that seasonal factors might stand in the way of progress. It remains to be seen if that pattern continues in early 2025, but it's on investors' minds.

Checking the rate outlook, the CME FedWatch tool now puts odds of a January Fed pause close to 89% and dials in high odds of just two rate cuts in 2025, down from four not long ago. The tool pegs chances for at least one rate cut in the first quarter at around 50-50, with a slight edge favoring one cut in the quarter following 100 basis points of loosening since last September.

The S&P 500 slipped 63.9 points or 1.07% Monday to 5,906.94. The Dow Jones Industrial Average lost 418.48 points or 0.97% to 42,573.73. And the Nasdaq Composite gave back 235.25 points or 1.19% to 19,486.78.

This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow. For important disclosures, see the show notes and schwab.com slash market update podcast.