This Week's Key Financial Catalysts

This week’s financial markets were shaped by a combination of profit-taking, fluctuating Treasury yields, and sector-specific volatility. While initial optimism buoyed by semiconductor strength and a potential “Santa Claus rally” provided early support, concerns over economic data and cautious trading ahead of the New Year’s holiday tempered gains. Here’s a detailed breakdown of the three key drivers that influenced the market this week.

1. Profit-Taking and Magnificent 7-driven Volatility

Profit-taking emerged as a significant theme this week, especially in the tech-heavy Nasdaq. After a strong year of gains, investors appeared to lock in profits ahead of the New Year, contributing to a downside bias in the market.

On Monday, markets opened with a negative bias, driven by profit-taking and investor caution ahead of New Year’s holiday closures. Despite initial declines, the Treasury market saw gains as investors sought safe-haven assets.

Thursday saw heightened volatility in mega-cap tech stocks, with Apple (AAPL) and Tesla (TSLA) leading the declines. Apple fell 2.6% following cautious analyst comments on iPhone demand, while Tesla dropped 6.1% after reporting its first annual decline in deliveries. Microsoft (MSFT) also slipped 0.7%, contributing to the overall sector weakness. The consumer discretionary sector was the worst performer, dropping 1.3%, while the information technology sector logged a modest 0.2% gain thanks to strength in semiconductor stocks.

However, on Friday, the mega-cap space regained some strength, helping indices to recover. NVIDIA (NVDA) jumped 4.45%, and Amazon.com (AMZN) rose 1.8%, contributing to a positive market skew. Apple extended its losses amid concerns over sliding iPhone demand in China and ongoing discounts.

2. Yields and the Dollar Influenced by Volatility and Economic Data

Treasury yields fluctuated throughout the week in response to economic data and investor sentiment. On Monday, Treasury yields declined as stocks faced selling pressure, with the 10-year yield settling at 4.55% and the 2-year yield at 4.25%, reflecting safe-haven buying.

Tuesday started with a rally in equities, but gains faded as the 10-year yield rose to 4.57%, marking a 69-basis-point increase for 2024. The 2-year yield finished 2024 at 4.25%, the same percentage it started the year at. Because the Fed lowered the Fed Funds Rate a few times, this reduced the pressure on short-term rates allowing for the yield curve to flatten. The yield curve was inverted for the previous three years leading many to think that a recession was on the horizon.

To kick off the new year, Treasury yields settled higher after fluctuating throughout the session. The 10-year yield ended the day at 4.58%, while the 2-year yield closed at 4.25%. The rising strength of the U.S. dollar also added pressure on equities, with the U.S. Dollar Index reaching 109.33, its highest level since September 2022. The dollar’s strength weighed on multinational companies’ earnings prospects, as a strong dollar reduces the value of overseas revenues when converted back to U.S. currency.

Economic data throughout the week painted a mixed picture of the U.S. economy. Initial jobless claims for the week ending December 28 decreased by 9,000 to 211,000, indicating continued labor market strength. Continuing jobless claims also dropped by 52,000 to 1.844 million. The key takeaway from this report is that employers remain reluctant to let go of workers, suggesting an optimistic view of business prospects.

The December ISM Manufacturing Index came in at 49.3%, slightly above the consensus estimate of 48.5%, but still indicating contraction in the manufacturing sector for the ninth consecutive month. Meanwhile, construction spending was flat in November, with private construction seeing a slight uptick of 0.1%, while public construction declined by 0.1%. Year-over-year, total construction spending was up 3.0%, but the lack of momentum in nonresidential spending highlighted ongoing challenges in housing.

3. Company and Sector Highlights

The semiconductor sector stood out as a beacon of strength early in the week, providing a glimmer of optimism amid broader market weakness. The PHLX Semiconductor Index (SOX) rose 0.8% on Thursday, driven by gains in key components like NVIDIA and Broadcom. Semiconductor-related stocks continued to outperform, offsetting some of the losses in the broader information technology sector.

Energy stocks also performed well, buoyed by rising commodity prices. WTI crude oil futures settled 1.9% higher at $73.11 per barrel on Thursday, while natural gas futures climbed 1.6% to $3.15 per million British thermal units (mmbtu). The energy sector’s 1.0% gain on Thursday made it a standout performer in an otherwise mixed market.

Conversely, the consumer discretionary sector faced significant pressure, with major names like Tesla and Apple dragging down the sector’s performance. Tesla’s weak Q4 deliveries report resulted in a 6.1% drop on Thursday. Apple’s decline was fueled by reports of iPhone discounts and softening demand in China, raising concerns about future revenue growth.

Eli Lilly (LLY) made headlines after receiving FDA approval for Zepbound (tirzepatide), a new prescription medication for moderate-to-severe obstructive sleep apnea in adults with obesity. The approval is expected to drive significant revenue growth for Eli Lilly in the coming years.

Finally, the White House’s decision to block the Nippon Steel takeover of US Steel added to market volatility. US Steel (X) fell 6.53% after the White House blocked a takeover attempt by Nippon Steel, citing national security concerns. Both companies condemned the decision, calling it unlawful, but the move underscored the Biden administration’s focus on protecting domestic industries from foreign acquisitions and competition.

Conclusion: Navigating Volatility and Uncertainty

This week’s market dynamics highlighted the challenges of navigating profit-taking, fluctuating Treasury yields, and sector-specific volatility. Early in the week, while semiconductor and energy sectors provided some support, profit-taking and cautious sentiment ahead of the New Year holiday tempered gains.

The ongoing strength in Treasury yields and the U.S. dollar added pressure on equities, particularly for multinational companies facing currency headwinds. Economic data painted looked good, with continued strength in the labor market offset by the 9th consecutive monthly contraction in the manufacturing sector and stagnant construction spending; however, the improvement in the manufacturing ISM numbers was a nice change.

Looking ahead, investors will be closely monitoring upcoming economic reports and corporate earnings to gauge the trajectory of the U.S. economy in early 2025 as investors wait to see if earnings can catch up to price growth from 2024. A key event next week will be the annual Consumer Electronics Show (CES) January 7th through 10th in Vegas where it is widely anticipated Nvidia will unveil its latest chip architecture and new consumer graphics processing units (GPUs) – which is creating some hype around anything else CEO Jensen Huang may say about chip demand and AI.

Important - the option and stock market will be closed on January 9th while the bond market will close early at 3:00 p.m. ET in observation of President Biden’s announced National Day of Mourning for former President Jimmy Carter.

Chart of the Week

This week is a technical chart of the S&P 500 which is testing some key levels. While a short-term top has formed with a Head & Shoulder pattern, it hasn’t completed with a clear break below support. Upside potential is being hindered by the 50-day moving average at 5944 – which is where investors are doing battle as I write today. The S&P 500 was knocked down in December, but the fight isn’t over. A break below 5864 by 1-3% on a close would be the signal that the S&P 500 is headed lower to the pattern’s target of 5638. I think if that happens, we could test a few support levels in that area including the former summer highs and the rising 200-day moving average. A confluence of support levels there could be the staging area for a rally if a correction plays out in January – but first, 5864 would need to be taken out by a 1-3% close below that level.

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