Santa sidelined: Markets slide as rising yields steal the show

• Stocks waver as we say good bye (or is that Good BUY) to 2024.

• Contra trades proved to be the winners on Friday.

• 10-year bond yields at 4.6% - posing a ‘problem’ for some stock investors.

• Oil and Gold holding steady, Dollar advances.

• Try the Blistered Cherry Tomatoes on a Bed of Whipped Cheeses.

Stocks ended lower on Friday, SMID’s and tech suffering the brunt of it as the Mag 7 and ‘few other names’ came under year end selling pressure. The lower trading volumes only amplifying the moves – something I have been warning you about. By the end of the day – it was red across the screen….the Dow down 335 pts or 0.8%, the S&P lost 67 pts or 1.1%, the Nasdaq gave back 300 pts or 1.5%, the Russell ended lower by 35 pts or 1.6%, the Transports giving back 75 pts or 0.5% while the Equal Weighted S&P lost 52 pts or 0.7%.

Every major sector lower…..Consumer Discretionary XLY – 1.6%, Tech XLK – 1.3%, Communications XLC and Real Estate XLRE – 0.9%, Industrials XLI and Financials XLF lost 0.8%, Consumer Staples XLP, Basic Materials XLB and Healthcare XLV all lost 0.5%, Utilities lost 0.3% while Energy was the winner – closing just a hair below the unchanged line.

Further down the chain we saw weakness in Homebuilders XHB – 1.2%, Retail XRT – 1.25%, Airlines JETS -1%, Disruptive Tech ARKK – 2.8%, Semis SOXX – 0.85%, Metals & Miners XME – 1.25%, The Value Trade SPYV – 0.6% while the Growth Trade SPYG – 1.5%. The S&P Small Cap 600 ‘growth’ trade - IJT losing 1.5% while the S&P Mid-Cap 400 Value – IJJ gave up 0.8%.

But as you expect – when stocks decline – the Fear Index surges – the VIX +8% and that sends the contra trades higher! The DOG + 0.8%, PSQ + 1.5%, SH + 1.1%, VIXY + 4.8%, the SPXS (Direxion S&P triple levered short) +3.45%.

And so why the weakness? Where is Santa? Well, have you taken a look what bonds are doing? 10 yr bond yields are up another 20 bps since JJ CUT rates on December 18th. – and they are up 100 bps since that ‘famed’ September cut that ‘demanded’ a bold move…. Remember? JJ tried to convince us that a 50-bps cut was appropriate, because the labor market was stalling…. yeah – How’s that working out? (Recall his famed ‘inflation is transitory’ argument)? The labor market is not stalling, and you know what else is not stalling? Inflation…

This morning – the 10-yr yield is 4.59%.... last week we kissed 4.63% and that my friends is the issue…. RISING bond yields….and so you ask, why are yields rising when JJ is cutting? Shouldn’t yields go in the same direction as FED funds?

Well, When the 10-year Treasury yield rises while the Fed is cutting rates, it can signal several complex dynamics at play in the bond market and the broader economy.

1. Market expectations of inflation

If long-term yields rise while the Fed cuts rates, it could indicate that markets expect higher inflation in the future. This might happen if the Fed’s rate cuts are seen as too aggressive, potentially overstimulating the economy. Bingo!

2. Improved economic outlook

Rising long-term yields may reflect optimism about economic growth. Markets might interpret rate cuts as successful in stimulating the economy, leading to stronger demand, investment, and eventual growth, which pushes long-term yields higher. (this is not the argument right now – the economy does not need to be stimulated).

3. Diminished risk aversion

Investors may move out of safe-haven assets like long-term Treasuries into riskier investments (e.g., stocks) – causing bond prices to fall and yields to rise. This could indicate improving sentiment in financial markets despite the Fed’s rate cuts.

4. Supply-demand imbalances

If the government issues more long-term debt (e.g., to finance deficits), this could increase the supply of 10-year Treasuries, pushing yields higher regardless of Fed policy. Simple supply/demand argument. Econ 101.

Additionally, foreign central banks or large institutional investors might reduce their purchases of Treasuries, also putting upward pressure on yields. (less buyers, means lower prices = higher yields)

5. Concerns about policy effectiveness

Rising yields might suggest doubts about the effectiveness of rate cuts. If investors believe the Fed is "behind the curve" (e.g., not addressing structural issues or failing to stabilize the economy), long-term rates might rise as a hedge against uncertainty.

6. Term premium adjustments

The term premium (the extra yield demanded by investors for holding longer-term bonds) might increase due to perceived risks related to inflation, debt sustainability, or uncertainty about future Fed actions.

In any event – the bond market is telling us to be cautious….so pay attention – again, do not get ‘fomo-ized’. Patience is a virtue.

And do not discount the recent strength in the dollar….it is up 7% for the quarter and up 2.2% in the last month. Remember – a strong dollar can have significant impacts on stock prices and commodities, with the effects varying based on a company's operations, sector, and market focus.

Oil continues to trade at $70.40.

Gold is trading at $2628 – down $4…. but still within the $2600/$2700 trading range that we have been discussing. Continued strength in the dollar will put pressure on gold and other commodities.

US futures are down again this morning…. Dow futures are down 70 pts, S&P’s down 11, the Nasdaq down 36, while the Russell is flat. Eco data today includes Pending Home Sales – expected to be +0.8% - but do not expect this to be a market driver at all.

Much of what happens over the next 2 days will be technical – some profit taking, some tax selling and some short covering – all very typical for this time of year. It’s another holiday shortened week, volumes will be light, moves will be exaggerated. Don’t make any major investing decisions this week.

European markets are mixed…. Euro Stoxx, UK and Germany just a bit lower, while France, Spain and Italy are just a bit higher.

The S&P ended the day, down 67 pts at 5970. Again, you know how I feel. It’s been a good year – if you were in it and were well diversified, Santa left you plenty under the tree. Next week is a new year and for those that are just starting out – start out slow, create a plan and be methodical. For those of you who are already, continue with the plan, remain strategic.

New year’s eve appetizer dish for your party

Blistered Cherry Tomatoes on a bed of Whipped Cheeses.

For this you need - cherry tomatoes, garlic, olive oil, honey, s&p, 8 oz of Philly cream cheese, 1 package of feta cheese and a French Baguette sliced into pieces and toasted with a garlic butter mixture.

Begin by turning the oven to bake 450 degrees.

In a baking dish, add the tomatoes, 4 or 5 cloves of sliced garlic, some olive oil and honey (maybe ¼ cup). Season with s&p and some ‘Italian seasoning. Mix to coat all the tomatoes. Place it in the oven for about 20 mins.

While that is cooking - in a food processor - add the cream cheese, feta, honey, 1/4 c of water, s&p. - blend until it is all whipped.

Now in a shallow serving bowl - make a bed of whipped cheese - and then add the blistered tomatoes - drizzling some of the ‘juice’ over the top.

Serve this with the toasted slices of the French baguette.