@theMarket: Markets Falter to Start the Year

After several days of profit-taking, stocks tried to stage a recovery in the first two days of the new year with varying success. Traders are cautious and fear that there may be more downside to come.

 

While Santa made at best a brief appearance this year as far as the expected rally was concerned, the damage was not all that great. The S&P 500 Index suffered a loss of less than 3 percent from its all-time high while NASDAQ was hit harder.

 

The dollar and bond yields continued to climb as foreign currencies fell against the dollar in preparation for the incoming administration's expected new tariff regime. Most overseas markets vastly underperformed the U.S. equity market last year. This year, analysts are calling for more of the same as Europe, Asia, and emerging market economies decline.

 

The U.S. economy continues to perform. The latest employment data, this week's jobless claims, unexpectedly fell to the lowest since March. The overall number receiving unemployment benefits fell by 52,000 to 1.84 million workers, the lowest since September.

 

These results build the Fed's case that further interest rate cuts should be approached cautiously in 2025. As it stands, they are projecting only two rate cuts for the entire year. Part of that caution stems from a wait-and-see approach to how the new administration's economic policies will impact the markets.

 

While investors tend to be optimistic heading into the new year, the same old issues have not disappeared. Concerns over the back-up in inflation, what a tariff war will do to the economy and heightened geo-political risks have not gone away. The end of the week saw US equities bounce but the move lacked enough strength to convince me that the profit-taking that occurred last week is quite over.  The lack of a widening out of the market continues to trouble me.  Breathe needs to improve and that is not happening as of this week.

 

Right now, the algo traders and options markets are programmed to react violently when certain levels are breached on the upside and downside of the markets. This happens in periods like this when volumes are muted, and many traders are still on holiday. When these levels are hit on the downside, selling intensifies pushing stocks even lower. The same occurs on the upside. This creates a chop fest for those who are actively trading. It is not for the faint of heart.

 

It would not surprise me if we pulled back in the next week or two by another 4-5 percent on the S&P 500 before this period of consolidation is over. Given that the S&P 500 was up 23 percent for the year and the NASDAQ close to 30 percent a little more profit-taking would be normal.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.