Key Takeaways
- Rising Bond Yields And Oil Prices Signal Inflationary Concerns Amid Market Weakness.
- Debt Ceiling Deadlock And Downgrades Pose Risks To U.S. Financial Stability.
- Stocks Struggle To Hold Gains As Traders Watch Key Technical Levels
Markets are off to an inauspicious start in 2025. On Tuesday, despite a strong open, the S&P 500 fell 1.1%. The Nasdaq Composite dropped 1.9%. Small cap stocks fared slightly better, dropping 0.8%, while the Dow Jones Industrial Average fell less than 0.5%.
Bonds continue to fall with yields on the 30-year reaching 4.96% in premarket. That is up from the 4.82% I discussed in my column on Monday. The yield on the benchmark 10-year is 4.72%. That is up from a low of 3.59% back in September. As I have been saying, the rise in yields concerns me and as is the case with most assets, round numbers tend to have a psychological significance. The 30-year is now pushing up against 5% and the 10-year is within striking distance as well. This is causing mortgage rates to push up against 8% and could lead to a slowdown in the housing market.
At the same time bond yields are rising, the weakness in stocks is becoming more pronounced. The S&P 500 has now broken through both its 21 and 50-day moving average. While I don’t often discuss technicals, the break below these levels can be important. Many traders, especially momentum traders, use these levels as guides and when the moving averages fail to hold, selling pressure can increase. Typically, it takes about three tries before stocks break through their 50-day moving average, so I will be very interested whether stocks bounce back above that level on Wednesday.
The other concerning asset that I’ve mentioned, oil, isn’t behaving any better. In premarket, oil prices moved above $75 per barrel, which is nearly 2% higher from Monday’s close. Oil is a finicky commodity. There is a range that most traders like to see it stay between. Usually, $65 to $80 is considered good. Below $65 can be a potential recessionary indicator and above $80 is when traders begin worrying about inflation. When you consider the move in bonds in conjunction with what we’re seeing with oil, I think there is a legitimate reason to be slightly concerned about inflation.
We have several very important macroeconomic events taking place at the moment. Later on Wednesday, we’ll get the most recent Federal Reserve Open Market Committee meeting minutes. Following its December meeting, the tone of Chair Jerome Powell was drastically different from what we heard most of last year and optimism for future interest rate cuts were pared back. According to the CME FedWatch tool, there is a less than 5% chance the Fed will cut rates when they meet at the end of January and less than 50% chance they will cut at the next meeting, scheduled for March. A variable in that rates equation will be the labor market and Friday’s jobs number. According to Bloomberg, analysts are looking for 154,000 new jobs with an unemployment rate of 4.2%.
We also have the debt ceiling issue still unresolved. Thus far, Congress has failed to pass an increase in the debt limit and they’re running out of time to get a deal done. The risk here is that should we fail to increase the limit; the U.S. could miss a payment on its debt. Simply the risk of this happening has implications. In 2023, rating agencies downgraded U.S. debt to AA+ from AAA. A failure to extend the limit and a missed payment will almost certainly result in a further downgrade.
Taking a look at some individual stocks, shares of Exxon Mobil could come under pressure after the company warned profits could be lower in the last quarter because of low oil prices and tight margins. Palantir shares fell over 7.5% on Tuesday and are indicated lower in premarket trading. That stock is down 19% from its December high. Morgan Stanley issued a bearish call on Palantir, and various funds run by Kathy Woods have been selling the stock recently as well. Quantum computing stocks in general have struggled of late. On Monday, Nvidia CEO Jensen Huang said quantum computing is still decades away and that led to weakness among these stocks. Lastly, Flutter warned about their earnings, saying that this past NFL season saw more favorites win and cover the spread in nearly 20 years.
A few odds and ends to keep in mind. The looming strike of dock workers along the East Coast remains a possibility. No new deal has emerged. Bitcoin, which had gotten back up over $100,000, has fallen around 5% to $95,000 in the last few days. Also, market volatility is up nearly 5% in premarket after jumping 11% yesterday, with the VIX at 18.69.
Finally, with markets being closed Thursday, we could see some interesting activity on the close. Traders will have to make position adjustments for Friday’s jobs numbers on Wednesday, instead of Thursday. As I mentioned above, it usually takes a few tries to break a 50-day moving average, so I am interested if stocks can rally on Wednesday. On Tuesday, we saw a strong start to the day, only to end much lower and that came after Monday’s rally also fizzled out. Therefore, I would like to see stocks not only rally but hold that rally. As always, I would stick with your investing plan and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.