As Treasury yields drop and the Federal Reserve announces the end of the rate-hike cycle, investors start to recover faith in the US stock market.
It has been a month since the selloff in US stocks, but investors are back in the game. The bond-stock relationship has been extremely close in recent months, as bonds have increased in value while stocks have declined, reaching a 16-year high in the process. High yields increase the cost of capital for individuals and businesses while providing competition for stocks as an investment.
The announcement of lower-than-expected US government borrowing, however, has caused the dynamics to shift and suggests that the Federal Reserve is drawing closer to the conclusion of its rate-hike cycle.
After the Fed's rates stabilised recently, investors chased performance until year-end, which supported the other asset classes.
As bond prices move in the opposite direction, yields on the benchmark 10-year US Treasury are currently down approximately 35 basis points from October's 16-year highs. The S&P 500 experienced its largest rise since November 2022 as it increased 5.9% over the previous week. Despite having increased by about 14% so far this year, the index is down about 5% from its July high.
Furthermore, the amount of equity that active money managers are exposed to is the lowest it has been since October 2022, which presents a compelling opportunity for investors who like contrarian investing.
An exceptionally oversold market, a robust economy, and a dovish tone from the Federal Bank have all contributed to the surge in equities.
The positive outlook is additionally reinforced by the US employment figures, indicating a cooling of the labour market and bolstering the argument for the Fed to postpone additional rate hikes.
The US labour market appears to be cooling, which supports the Fed's decision to hold off on raising interest rates. The employment data also revealed a minor uptick in the jobless rate and the lowest pay increase in two and a half years. The S&P 500 had a day-end gain of 0.9%.
Naturally, many investors are still reluctant to buy stocks again quite yet. The market's largest technology and growth stock, Apple Inc., a bellwether in the industry, was the latest on Thursday to provide a lacklustre outlook. Wall Street was underwhelmed by the iPhone maker's holiday sales prediction. LSEG reports that at least 14 analysts lowered their price targets for the company.
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