The 10-year US Treasury bond yield at one point exceeded the 4% mark, causing concern for investors…

Illustration – Photo: Bloomberg

The US stock market experienced a decline on the first trading day of the year 2024 as government bond yields rose, leading some investors to take profits after a strong year-end surge. Crude oil prices were volatile during the session and closed significantly lower, amid investors monitoring developments in the Red Sea and continued concerns about record-breaking US oil production while China’s energy demand weakens.

At the close, the S&P 500 index fell 0.57%, closing at 4,742.83 points. The Nasdaq index dropped 1.63% to 14,765.94 points, marking the most significant decline since October. Meanwhile, the Dow Jones index gained 25.5 points, equivalent to a 0.07% increase, reaching 37,715.04 points.

Apple’s sharp decline, with a nearly 3.6% drop after Barclays downgraded its recommendation to hold, exerted downward pressure on the S&P 500 this session. Apple accounts for over 7% of the broadest measure of the US stock market. In contrast, Dow Jones maintained gains thanks to the rise of defensive stocks such as Johnson & Johnson and Merck.

Before this session, the US stock market ended 2023 with impressive results, with the S&P 500 recording a nine-week consecutive gain, the longest streak since 2004. The strong year-end market recovery was driven by decreasing inflation while the economy remained robust, and the US Federal Reserve (Fed) signaled the end of interest rate hikes while predicting rate cuts in 2024.

Despite significant challenges such as the war in Ukraine and the Middle East and the regional banking crisis in the US, the S&P 500 rose 24% throughout last year.

Technology stocks, especially large-cap technology stocks, led the market’s upward trend, including Apple with a 48% increase, Microsoft with nearly 57% increase, and Nvidia with a 239% increase. As a result, Nasdaq recorded a 43.4% increase for the year, the strongest since 2020.

Dow Jones rose 13.7% throughout last year, setting a new record.

The decline in US Treasury bond yields in recent weeks has supported stock prices. After surpassing 5%, the highest in 16 years, at the end of October, the 10-year US Treasury bond yield fell below 3.9% at the end of the year.

However, during Tuesday’s session, the 10-year US Treasury bond yield had moments above 4%, causing concern for investors. Increasing yields are considered a sign that the market is reducing expectations of interest rate cuts this year.

Speaking to Reuters, Jack Janasiewicz, a strategist at Natixis Investment Managers Solutions, said the biggest concern now is whether the market is mistaking the economic slowdown for signs of an impending recession. In the event of a recession, the Fed may cut interest rates up to six times, as investors have recently expected.

“The risk is that there have been some weak economic figures, but most importantly is how the labor market is performing. I sense that the market is anticipating a sharp economic downturn with a hard landing. That could be a mistake,” Janasiewicz said.

The most important US economic data this week is the overall employment report for November, expected to be announced by the US Department of Labor on Friday. If the figure is stronger than expected, expectations of interest rate cuts will diminish, putting pressure on the prices of risk assets such as stocks and commodity prices.

WTI crude oil prices for February delivery in New York fell $1.27 per barrel, equivalent to a 1.77% decrease, closing at $70.38 per barrel. Brent crude oil prices for March delivery in London fell $1.15 per barrel, equivalent to a 1.49% decrease, closing at $75.89 per barrel.

During the session, oil prices sometimes rose more than 2% due to escalating tensions in the Red Sea—a crucial bloodline for global maritime transport. Since the end of last year, Houthi rebels have intensified drone attacks on ships passing through this region, forcing many cargo ships to change their routes through the Suez Canal.

Helima Croft, a strategist at RBC Capital Markets, said that oil prices have not yet reflected the increasing tension in the Red Sea because traders still believe that there will be no disruption in the supply. “Basically, the market is declaring a wait-and-see approach to see what will ultimately happen. But tensions are increasing every day,” she said.

Currently, traders are paying more attention to the record oil production in the US and weakening oil demand in China, and these factors are putting downward pressure on oil prices, according to energy security expert Adi Imsirovic of the Center for Strategic and International Studies (CSIS).