The festive spirit typically surrounding the financial markets during the Christmas season came to a swift halt last week, as expectations of a "Santa Claus rally" for stocks were eclipsed by a surge in selling pressure across technology and growth stocksThe Chicago Board Options Exchange's Volatility Index (VIX) spiked nearly 20% during intraday trading sessions, hinting at a sudden shift in market sentimentRising yields on U.STreasury bonds have caught the attention of investors, trailing just 12 basis points from their yearly peaksThis environment has dampened investor risk appetite, triggering clear signals of profit-taking across the boardAs we approach the end of the year, shifting dynamics regarding interest rate cuts, policy expectations, and decreasing trading volumes during the holiday period may lead to further volatility in the markets.

December 31 is poised to be the last trading day for 2024. Thus far, the Nasdaq composite index has rallied 31%, while the S&P 500 has gained 25%, and the Dow Jones Industrial Average has seen an increase of 14%. A report from market research firm D.A

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Davidson shared with its clients expressed optimism as we transition into 2025. It noted heightened investor sentiment following a strong performance in November, which is believed to bolster positive trends for the upcoming year and generate expectations for growth-friendly policiesIf the U.Seconomy can sustain a growth rate exceeding 2% and corporate earnings increase by over 10%, it could provide a firm foundation for rising stock prices.

In light of the approaching holiday season, market participants have adopted a cautious stance regarding potential interest rate cutsAs data becomes sparse with the festive period, consumer spending statistics have gathered significant attention as a key indicator of economic healthOn December 26, Mastercard reported that U.Sretail sales surged 3.8% year-on-year from November 1 to December 24, outperforming the anticipated 3.2% and significantly exceeding the 3.1% growth experienced during the previous holiday season

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The credit card giant projected that the final days of holiday shopping could account for approximately 10% of overall annual sales.

Meanwhile, the labor market has remained solidAccording to the U.SDepartment of Labor, initial jobless claims fell by 1,000 to 219,000 last week, exceeding market expectationsHowever, the number of continuing claims rose by 46,000, reaching 1.91 million—the highest level since November 2021. As demand and supply appear to realign, the time it takes for unemployed individuals to find new positions has lengthenedRecent surveys indicate that several companies are considering whether to expand their workforce further.

Bob Schwartz, a senior economist at Oxford Economics, spoke with reporters emphasizing the importance of consumer spending as a backbone of the economy, with the job market playing a pivotal role"While the labor market has cooled compared to last year, it's characterized more by a slowdown in job growth than widespread layoffs

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Job seekers are finding it more challenging to secure new employment; however, the deceleration in workforce growth should offset the upward pressure on unemployment rates," Schwartz explained.

Longer-term U.STreasury yields have continued to climbThe two-year Treasury yield, closely aligned with interest rate expectations, rose 1.4 basis points to 4.325%, while the benchmark 10-year Treasury yield jumped 9.7 basis points to 4.619%, marking new highs since MayFutures tied to the federal funds rate suggest that, following successive interest rate cuts, the Federal Reserve may freeze rates for a while, with the likelihood of a reduction next April slightly exceeding 50%.

The Chief Investment Office of UBS Wealth Management has advised clients to brace for a slower pace of rate cuts by the Federal ReserveThey assert that stronger-than-expected inflation data from the U.Sand a more hawkish tone from the Federal Reserve meetings imply only a 50 basis point reduction in 2025. Schwartz noted that the Fed's announced hawkish stance in mid-cycle developments could create economic uncertainty, as elevated rates might exert pressure on the real estate market and temper manufacturing recovery, reducing the urge to stockpile prior to potential tariffs

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However, Schwartz maintained that the probability of a recession, according to the Fed's recession models, has dropped to its lowest levels since 2022, highlighting that consumer spending remains robust, supported by healthy balance sheets and solid wage growth.

As the market ebbed and flowed during the week, volatility was initially pronounced before major indexes concluded the week on a high noteData from the Dow Jones indicated that last week's performance was primarily positive across industries; energy and healthcare sectors led the way with hikes exceeding 1%. The tech sector, which comprises significant portions of market cap, saw a weekly increase of 0.9%, driven by gains in key semiconductor stocks—Broadcom surged 9.5%, while Nvidia saw a rise of 2.1%. The financial sector's positive performance followed litigation by some U.Sfinancial institutions regarding the perceived flaws in the Federal Reserve's stress testing framework

Consumer discretionary stocks also advanced, with Starbucks enjoying a near 5% jump in response to the return of employees after a five-day strike.

A notable recovery in U.Sequity funds occurred last week, as capital inflows rebounded significantly amid better-than-expected inflation reports, the government avoiding a shutdown, and the anticipated "Santa Claus rally." According to data provided by the London Stock Exchange Group (LSEG), U.Sequity funds witnessed inflows for the seventh week in a row, reaching $20.56 billion, after the prior week's net sales reported at $49.7 billionInvestment focus shifted towards large-cap stock funds, which saw net purchases of $31.67 billion—marking the highest inflow since October 2, following net sales of $20.94 billion the week priorConversely, small and mid-cap funds experienced outflows of $2.95 billion and $1.17 billion, respectively.

The behavior of treasury yields became a dominant factor influencing late-week market fluctuations

Michael Reynolds, VP of Investment Strategy at Glenmede, opined, "Whenever interest rates rise palpably, capital costs inevitably increase, prompting investors to scrutinize valuations across major indices and consider if better opportunities lie elsewhere." He acknowledged that profit-taking, given the robust bull market lasting over two years, is an entirely natural occurrence"It is not unexpected to see investors cashing in and rebalancing their portfolios before the new year," he concluded.

Charles Schwab noted in its market outlook that fears over potentially higher yields loom, but so long as the 10-year Treasury yield remains beneath the crucial 5.0% mark, the bullish narrative remains intactThe financial landscape becomes challenging for consumers, businesses, and governments as yields climb; borrowing costs rise concurrently, making fixed-income investments more appealing against equities.