Last Friday, the three major U.S. stock indices fell across the board, capping off a holiday-shortened trading week. The widespread sell-off affected technology and growth stocks, which had previously been the driving forces behind market gains. The Dow Jones Industrial Average ended a five-day rally after experiencing its longest consecutive 10-day decline since 1974.
Market Correction and Profit Taking
Michael Reynolds, Vice President of Investment Strategy at Glenmede, pointed out, "Profit-taking is the main reason. After over two years of a strong bull market, many investors are choosing to rebalance their portfolios before the New Year." All 45 of the best-performing stocks on the S&P 500 this year closed down on Friday, as the selling wave weakened the traditional year-end "Santa Claus rally."
According to historical data, the S&P 500 typically gains an average of 1.3% in the last five trading days of December and the first two trading days of January. However, Friday's correction showed a reversal in market sentiment due to profit-taking.
Impact of Rising Interest Rates on the Market
Higher bond yields are seen as the primary factor suppressing growth stocks. On Friday, the U.S. 10-year Treasury yield hovered around 4.63%, its highest in over seven months. The increased cost of capital makes corporate borrowing for expansion more expensive, putting particular pressure on tech stocks.
Led by Tesla, the "big seven tech" stocks were among the biggest losers, with Tesla dropping 5%, NVIDIA 2.1%, and Alphabet, Amazon, and Microsoft each sliding over 1.5%. Reynolds explained, "As interest rates rise, investors may reevaluate the risks of high-valuation stocks and look for other more value-oriented investments."
Broad Decline Across Key Sectors
All 11 major sectors of the S&P 500 fell on Friday, with consumer discretionary, information technology, and communication services leading the declines, falling between 1.1% and 1.9%. These sectors had been top performers during the 2024 market rally but were not spared from Friday's pullback.
Weekly Gains Remain Notable for Major Indices
Despite Friday's correction, the three major U.S. indices still recorded gains for the week. The S&P 500 rose 0.7%, the Dow Jones Industrial Average gained 0.36%, and the Nasdaq increased by 0.75%. Due to the shortened holiday trading week, trading volume was lower than the six-month average, a trend expected to continue until January 6.
Looking Ahead
The market's next focal point will be the December employment report, set for release on January 10. Analysts believe this report could provide more clues for the Federal Reserve's monetary policy adjustments, influencing future interest rate trends and market performance. Investors will be closely analyzing the data to assess market risks and potential opportunities.
