Following a brief holiday hiatus, the U.Sstock market opened on a downturn on the 30th, closing lower than expectedThis downturn left many investors, who had banked on a traditional end-of-year rally known as the "Santa Claus rally,” feeling disheartenedMarket participants had hoped for a festive boost as we approach the end of the year, but disappointment has reigned instead.

The Federal Reserve's year-end decision had intensified pressure on U.STreasury yields, which momentarily approached the 4.60% threshold, translating into difficult conditions for technology growth stocks that had previously led the market upwardWith the turnover of power to a new government looming, the trajectory of policy and waning expectations of monetary easing have added continued pressure on Treasury bonds, which could expose the market to significant valuation shocks and increased volatility.

This environment has also clamped down on risk appetite among investors

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Despite a reduction of 75 basis points in the federal funds rate since September, the yield on the benchmark 10-year Treasury note has climbed nearly 100 basis points over the past three monthsThis surge in yields has raised alarm bells on Wall Street, as many anticipate that the resilience of the U.Seconomy might prevent inflation from dropping further and could diminish the likelihood of further monetary easing policies.

Just last Friday, growing concerns over stock market valuations were reflected in trading patternsDavid Morrison, a senior market analyst at Trade Nation, expressed that persistently high yields would pose substantial resistance to stock pricesInvestors, facing a yield close to 5% from U.STreasury securities, might opt for the relative safety of bonds over the uncertainties associated with equities, particularly when many stocks appear to be trading near historical highs.

Quasar Elizundia, a research strategist at the brokerage firm Pepperstone, noted that the ongoing rise in bond yields has brewed apprehensions regarding the Federal Reserve possibly maintaining a hawkish stance on monetary policy for an extended period

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This could, in turn, exert downward pressure on corporate earnings growth projections for 2025, inevitably affecting investment decisions in the current climate.

Investors have exhibited caution due to rapidly growing supply amidst promises of tax cuts, yet practical steps to rein in budget deficits remain elusiveWith an array of at least 25 executive orders anticipated upon assuming office on January 20, covering issues from immigration to energy and cryptocurrency policy, analysts expect a significant yet perhaps muted impact on fiscal policyGoldman Sachs analyst David Mericle remarked that while a second administration's changes to immigration, trade, and fiscal policy may carry meaningful implications, they are unlikely to include more dramatic proposals.

Michael Reynolds, Vice President of Investment Strategy at the Glenmede Trust Company, pointed out that higher rates typically lead to increased capital costs, compelling investors to reevaluate valuation metrics for major tech stocks

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He indicated that it is not surprising to observe profit-taking and rebalancing of portfolios as we approach the new year, given that we have been in a robust bull market for over two years.

As the dynamics between the U.STreasury and stock markets continue to evolve, there lies a troubling inverse correlation that could disrupt market stability in the coming monthsJulian Emanuel, the chief strategist at Evercore ISI, explained that while long-term earnings power drives stock prices, rising long-term yields can sometimes inflict mid-term pressures on them.

He also noted that there could be a pullback in benchmark yields in the days to come following their significant uptick, driven by various factors including a potential unwind of previously held short positions in overvalued Treasury bonds and a reduction in geopolitical tensions in oil-sensitive regions, which would ease inflationary concerns.

However, these fiscal policy dynamics, along with worries that China and Japan may decrease their purchases of U.S

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Treasuries, could keep yields elevated in the medium termThis scenario presages heightened volatility for both bonds and equities as we head into early 2025. Emanuel elucidated that the relationship between yield pressures and stock prices is not consistently stable, with fluctuations between valuation stasis and expansion noted in cycles throughout recent decades.

The report indicates that over the years, there has been no single benchmark yield level that has universally signaled stock market correctionsThe “trigger levels” displaying correlation ranges widely, from as low as 3% in 2018 to as high as 6% in 1994. In the current cycle, senators have the consensus that a 4.5% yield on the 10-year Treasury would not spell doom for the stock market; however, surpassing 4.75% could herald a deeper and more prolonged market correction.

In his assessment, Emanuel flagged a critical alarm at 5%, as this was where the market saw a downturn in October 2023. He compared this backdrop to the 3% yield that was prominent under immigration policy when threatening higher rates loomed large over cyclical bull markets