In the aftermath of a brief holiday break, U.Sstock markets experienced a notable decline ahead of the market's opening on the 30th, extending this downward trend through to the closing bellThis performance left many investors who were hopeful for a "Santa Claus rally" feeling disheartened and uncertain about the market's future trajectory.

Contributing to this bearish sentiment is the recent decision from the Federal Reserve, which has raised concerns over the stickiness of inflation and the implications for monetary policyThe yield on U.STreasury bonds briefly approached 4.60%, applying significant pressure on the technology growth stocks that had been leading the market upwardsAs the transition to a new government approaches, expectations around policy advocation and a softening forecast for continued Federal Reserve accommodation could maintain downward pressure on these bonds, exposing the market to potentially greater valuation shocks and volatility.

The anxieties surrounding risk preferences are palpable

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Following the Federal Reserve's hawkish cuts, worries about inflationary persistence in the U.Seconomy have reignited fears of rising pressures that might bolster inflation in the futureConsequently, this has thrust the benchmark 10-year Treasury yield to its peak level since late MaySurprisingly, following significant reductions in the federal funds rate, which fell by 75 basis points since September, the 10-year Treasury yield has increased by nearly 100 basis points in just three monthsWall Street analysts argue that the resilient U.Seconomy may inhibit the decline of inflation and lessen the likelihood of additional monetary easing.

The apprehensions surrounding stock market valuations became apparent last FridayMorrison, a senior market analyst at research firm Trade Nation, pointed out that if yields remain at elevated levels, they will act as a strong resistance against stock prices, pushing investors towards the relative safety of U.S

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Treasuries with nearly 5% returns rather than the uncertainties associated with stocks, many of which are trading at or near historical highsMeanwhile, the conversation among market specialists has also turned to the implications of a shrinking supply, especially as proposals for tax cuts are put forth with scant plans to curb the burgeoning budget deficit.

Market expectations are now focused on January 20 when the new administration is expected to enact at least 25 executive actions addressing a range of issues from immigration to energy and cryptocurrency policyGoldman Sachs analyst Merrick noted in a report last Sunday that changes in immigration, trade, and fiscal policy from the new government could make a meaningful impact, though there won't be any dramatic proposals to shake the existing structure.

Reynolds, the Vice President of Investment Strategy at Glenmede, observed, "When interest rates rise so much, the cost of capital becomes higher, prompting investors to scrutinize the valuations of the seven major tech stocks and question whether they might find better value elsewhere." He further elucidated, "We've been in a very strong bull market for over two years now... so it's not surprising to see some taking profits and rebalancing portfolios before the new year."

The focus remains on the critical level of 5%. In recent years, a notable inverse correlation has emerged between U.S

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Treasuries and the stock market movementsEmmanuel, the chief strategist at Evercore ISI, expressed that this may continue to be an issue for equities in the months to come"Long-term profitability drives stock prices; however, even in a macroeconomic environment that remains favorable, the rise in long-term yields can sometimes exert mid-term pressure on stocks.”

Emmanuel believes that after a vigorous surge, the benchmark yields could see a slight pullback in the near term, driven by various factors including the unwinding of excessive short positions in Treasuries and a potential easing of geopolitical tensions in oil-sensitive regions, which could alleviate inflation fears.

However, elements such as U.Spolicy decisions, the fiscal deficit, and Japan's possible reduction in U.STreasury purchases could push yields higher in the mid-termThus, increased volatility in both bonds and equities is expected to persist into early 2025. It’s also important to note that the relationship between yield pressures and stock prices isn’t stable, experiencing phases of valuation stalling (2018) and expansion (1994, 2022).

The report highlights that over past decades, no unified "threshold" for 10-year Treasury yields triggering stock market corrections has emerged

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In fact, the past "trigger levels" have varied significantly, from 3% in 2018 to 6% in 1994. For the current cycle, Emmanuel posits that a 10-year yield around 4.5% is manageable for the stock marketNevertheless, a breach above 4.75% could herald a prolonged and deeper adjustment for equities.

He has drawn a red line at the 5% mark, noting that the low point for U.Sstocks in October 2023 surfaced around this level"This corresponds to the peaks in 2018 under tariffs and immigration policies when the 10-year Treasury yield hit 3%. Reaching or exceeding this level poses greater risks to the cyclical bull market," he warnedDespite anticipated turmoil in early next year, his organization remains bullish on U.Sstocks' performance for the entire year, projecting the S&P 500 index to hit 6,800 points by the end of 2025, representing a 15% upside from the close on the 30th.

Interestingly, as long as the 10-year Treasury yield remains below the critical 5.0% level, the theoretical foundation of the current U.S