The synchronized retreat of U.S. stocks and bonds at least indicates that investors are hesitating to catch up with the rebound in the fourth quarter, and a temporary pause in the U.S. stock market's rise is not necessarily a bad thing...

Traders had hoped that the broad market rebound at the end of last year could continue into 2024, but what greeted them on the first trading day of the year was a bucket of cold water, as stocks and bonds experienced one of their worst starts in decades.

The S&P 500 ETF Trust (SPDR S&P 500 ETF Trust, ticker SPY) and the iShares 20+ Year Treasury Bond ETF (iShares 20+ Year Treasury Bond ETF, ticker TLT) both fell by 0.6% on Tuesday, marking the first time since TLT's launch in 2002 that both have experienced a significant decline at the beginning of the year.

Although the first day's performance does not necessarily indicate how the market will perform for the rest of 2024, the synchronized retreat of U.S. stocks and bonds at least indicates that investors are hesitant to chase the rebound in the fourth quarter, with both the U.S. stock market and long-term Treasury bonds having risen by more than 10% last quarter.

Dennis DeBusschere, founder of 22V Research, said: "The most common concern we hear from investors is that overbought conditions and optimism will create conditions for a reversal in bond yields and the stock market at the beginning of 2024. This is hard to argue against."

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Is the U.S. stock market just experiencing a temporary pullback?

As one of the biggest winners in the stock market in 2023, tech giants led the sell-off on Tuesday, with Apple's stock plummeting after being downgraded by Barclays analysts. The Nasdaq 100 Index fell by 1.7%, marking the third-worst first-day performance since the bursting of the internet bubble in 2001.

There are signs that funds may be flowing out of recently favored stocks and into seemingly undervalued lagging stocks. On Tuesday, the Russell 1000 Growth Index fell by 1.5%, while its value index rose by 0.4%.

Bank of America strategists led by Savita Subramanian wrote in a report: "Many people (including ourselves) believe that the crowded trade of large-cap stocks in 2023 is a major risk for 2024. The market currently widely believes that large tech stocks will plummet significantly in January."

Oppenheimer Asset Management said that the U.S. stock market's rise may take a breather before the next earnings season arrives.The company's Chief Investment Strategist, John Stoltzfus, stated, "In fact, in our view, it makes sense for the market rally to pause, considering the rise in stock prices from the October lows to December."

Stoltzfus is one of the few who correctly predicted the surge in U.S. stocks in 2023. He remains optimistic for 2023 and expects the S&P 500 Index to reach 5,200 points by the end of 2024, just a few points shy of its record closing high. The strategist said, "A closing price above the previous high could boost market sentiment, thereby driving the stock market higher in the near term."

The focus will soon turn to the fourth-quarter earnings season, which will officially kick off on January 12th, when large banks, including JPMorgan Chase, will report their earnings. After last year's stock market surge, investors may have high psychological expectations. However, even so, Stoltzfus still believes that the market will rise before the end of the year. He said, "Our expectation is that stock prices will rise further this year, supported by improving fundamentals."

Market rate cut expectations cool, triggering bond market sell-off

As traders reduce their bets on significant rate cuts by major central banks this year, global bonds have generally been sold off, with short-term Treasury bonds leading the decline.

The benchmark 10-year Treasury yield rose by 9 basis points to 3.97%, while the yield on German government bonds of similar maturity rose by 9 basis points to 2.11%, the highest in over two weeks, and the 10-year UK government bond yield rose by 15 basis points. The Bloomberg Dollar Spot Index recorded its largest single-day gain since March 15th.

This reflects doubts about whether policymakers will deliver the degree of monetary easing priced in by the money market. Although central banks have more or less hinted that they may have ended this round of rate hikes, they are also unwilling to give up the fight against inflation too early. A large number of new corporate bond issuances have also put pressure on bonds, especially after their strong performance before the end of the year.

Gennadiy Goldberg, Head of U.S. Interest Rate Strategy at TD Securities, said, "Given the announcement of many corporate bond issuances today, I believe the supply issue is the reason behind this trend. But from a broader perspective, the market is still trying to find its footing before key data is released." The most noteworthy economic data this week is the December non-farm employment report.

The U.S. money market currently prices about 150 basis points of rate cuts by the Federal Reserve in 2024, about 7 basis points lower than last week's closing. Despite a slowdown in hiring, a resilient labor market supports the view that the economy will continue to expand in 2024.

Meanwhile, after selling pressure led to a roughly 5% drop in the U.S. dollar in November and December last year, the Bloomberg Dollar Index rose by more than 0.7% on Tuesday. Some technical analysts pointed out that this occurred after its 14-day Relative Strength Index fell below 30 earlier last week, indicating that the dollar was oversold and ready to reverse its trend.Jane Foley, Head of Foreign Exchange Strategy at Rabobank, said, "The market may anticipate interest rate cuts by the Federal Reserve this year, but since so many cuts have already been factored in, market expectations are likely to moderate. Assuming some hopes for rate cuts fade, the US dollar could strengthen first and then potentially weaken by the end of 2024."

The team's strategists believe that, despite the recent rebound of the US dollar, it is likely to fall again. They think that the Federal Reserve's rate cut efforts may be more aggressive than those of other major central banks and could come earlier.