Markets Moving in Lockstep Threaten to Make for a Trying 2024

livemint.com:

Some investors hold that as goes January, so goes the year. The performance so far—with the S&P 500 down 1.7% by Thursday’s close—doesn’t hold out great hope. But the first three trading days of the year offered a useful run-through of three of the ways that inflation and the economy affect your portfolio.

The year started the way the last one ended, with all the focus on the Fed and inflation, only in the opposite direction. Day One. Stocks plunged on Tuesday, the first trading day, as bond yields rose, amid concern that last year’s excitement about impending rate cuts had gone too far.

Over the final two months of the year, investors bet big on lower inflation and rapid Federal Reserve easing, lowering bond yields drastically and boosting stock prices. Since 1989, there were bigger eight-week drops in 10-year Treasury yields only amid the crises of 1998, 2008-09 and 2020, so it isn’t surprising that investors had second thoughts about the size of the swing. What’s unusual is bond yields and stocks moving in opposite directions—at least it was unusual until recently.

The 90-day correlation between moves in the S&P and the 10-year Treasury yield is about as negative as it’s been this century, as the focus on inflation pushes them in opposite directions more often than any time since investors concluded that Alan Greenspan’s Fed had conquered inflation. To understand Tuesday’s markets, and the rest of the week, we have to think about how the economy affects stocks and bonds. A stronger economy normally brings both higher profits (good for stocks) and more inflationary pressure, and thus higher interest rates (bad for stocks).