Post-Holiday Slump Plagues Stocks and Bonds, Marking Worst Kickoff Since 2003
The Wall Street outlook for 2024 is looking uncertain, as investors grapple with concerns over Federal Reserve policy and witness a significant drop across various asset classes. The start of the year has been rocky, with all major asset classes declining in the first week, leading to substantial losses in popular exchange-traded funds tracking equities and fixed income.
This market downturn has served as a harsh reminder of the dangers of complacency and overconfidence among investors. Those who were expecting interest rate cuts in March were thrown off by a stronger-than-expected jobs report, leading to uncertainty about future market trends.
Complacent investor positioning, particularly regarding central bank policy, played a significant role in the market decline. The repricing of assets resulted in a retreat from previously optimistic positions, including a reduction in the probability of a Fed interest rate cut in March.
The stock market pullback followed a period of increased buying, raising concerns among Wall Street contrarians. The pace at which fund clients unwound their bearish wagers since late October was larger than any period since 2018, aside from the pandemic rebound in March 2020. Such episodes tend to herald imminent weakness, with the S&P 500 falling an average 5% to a bottom in the following month.
Hedge funds also experienced a shift toward more positive net flows, causing caution among some market analysts. JPMorgan’s model showed that investors from individuals to pensions and asset managers have seen cash holdings as a percentage of their total portfolios falling toward the lows at the end of 2021, indicating a drop in potential buying power and thus posing downside risk to both equities and bonds going forward.
Despite these challenges, some analysts believe there are still opportunities for savvy investors. Rick Rieder, chief investment officer of global fixed income at BlackRock Inc., expressed positivity about the equity market’s technicals, noting that “there are some equities you could buy that are traded at three times cash flow, seven to 10 times earnings.”
