Wall Street wrapped up its holiday-shortened week with an unexpected pullback, deflating hopes for a traditional “Santa Claus” rally. Despite a year of robust market gains that saw major benchmarks repeatedly hit fresh highs, investors appeared eager to lock in profits and rebalance their portfolios. Rising Treasury yields, profit-taking in tech heavyweights, and caution ahead of the new year all contributed to a downbeat end to a largely triumphant 2024
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Tech stocks — which have fueled much of 2024’s rally — led the downturn. Tesla (TSLA) declined 5%, continuing its losing streak from the previous day. Nvidia (NVDA) also retreated by around 2%, while Amazon.com (AMZN) shed 1%. Known as the “Magnificent Seven,” these megacap technology names have been the market’s darlings, but higher interest rates and lofty valuations prompted traders to take profits.
“Investors may just be reassessing the bets they are taking when the cost of capital is higher, perhaps looking at some of the valuations on the Mag 7 and wondering whether they can find better value elsewhere.” — Michael Reynolds, Glenmede
Key Indexes Retreat
All three major U.S. stock indexes ended Friday in the red. Here’s how they fared at the close:
- Dow Jones Industrial Average (^DJI): -0.8%
- S&P 500 (^GSPC): -1.1%
- Nasdaq Composite (^IXIC): -1.5%
The declines ended a five-session winning streak for the Dow, while the S&P 500 and Nasdaq posted a second straight day of losses. Nevertheless, all three indexes still managed weekly gains: 1.5% for the Dow, and 1.8% each for the S&P 500 and Nasdaq.
Treasury Yields Hover Near Seven-Month Highs
The 10-year Treasury yield (^TNX) remained near 4.6%, its highest level since spring. Rising yields typically pose headwinds for high-growth stocks, as higher borrowing costs can crimp expansion plans and weigh on valuations. With yields on the rise, some investors have rotated capital away from technology into more stable or defensive sectors.
Profit-Taking and Portfolio Rebalancing
According to market commentators, much of Friday’s sell-off could be chalked up to profit-taking. The top 45 performers in the S&P 500 this year all ended lower on Friday, reflecting an across-the-board move to realize gains. With just three trading sessions left in 2024, many investors were also fine-tuning their positions and locking in profits before the new year.
“Today feels like there is quite a bit of profit-taking across the board. We are more than two years into a pretty strong bull market.”
— Michael Reynolds, Glenmede
Macro Data: Trade Deficit & Inventories
Amid the stock market turmoil, new government data shed light on the broader economy:
- Trade Deficit: The international trade deficit widened to $102.9 billion in November 2024, up from $98.3 billion in October. Exports rose by $7.4 billion to $176.4 billion, while imports climbed $12 billion to $279.2 billion, signaling steady demand despite higher prices.
- Wholesale Inventories: Inventories dipped 0.2% to $901.6 billion in November but remained 0.9% higher year-over-year.
- Retail Inventories: Retail inventories expanded 0.3% to $827.5 billion and surged 7.2% from the same period in 2023, reflecting continued consumer spending. Excluding auto, retail inventories increased 0.6%.
These figures suggest that consumer demand and business activity remain strong, even as concerns grow about inflation and higher interest rates.
Oil Market Update
In energy markets, the weekly Crude Oil Inventories report from the EIA showed a -4.237 million barrel decline, much larger than the forecasted -700,000 barrel drop. Despite the bullish signal for oil demand, West Texas Intermediate (WTI) slipped $0.48 to settle at $69.62 per barrel. Traders appear focused on potential economic headwinds and the ongoing tug-of-war between demand optimism and supply uncertainties.
Highly Unusual Options Activity in Nvidia (NVDA)
There were five highly unusual call trades expiring on January 24, 2025, the contract’s total volume (across all trades) reached a total amount of 73,431, far exceeding the open interest of 18,087, for a V/OI ratio of roughly 4.06. The combined premium paid for these positions is about $15.6 million. Each trade has a $140 strike price and is approximately 27 days until expiration. Notably, they were all labeled “Sweep” and executed at or above the asking price.
Outlook: Fed Policy & the Political Arena
Looking ahead to 2025, two overarching themes loom large for investors:
- Federal Reserve’s Rate Path
While markets have largely digested the Fed’s intention to scale back rate cuts next year, expectations point to a first cut possibly in May. With inflation still above the central bank’s target, policymakers appear hesitant to ease monetary conditions too quickly. - Political Uncertainties
Former President Donald Trump’s political comeback adds another layer of uncertainty to the macroeconomic and geopolitical landscape. Investors will keep a close watch on policy signals and potential disruptions that could influence financial markets in 2025.
