The stock market is poised for a turbulent year ahead, and the U.S. 10-year Treasury yield is forecasted to rise above 5%, according to a leading technical strategist. After an impressive rally in the final two months of 2023, the S&P 500 closed the year with a 24.23% gain, recording its fourth positive year out of the last five. The Federal Reserve’s anticipation of three interest rate cuts in 2024 bolstered the market’s upward momentum. However, market experts view this estimate as conservative, with some pricing in as many as six cuts. Ron William, founder of RW Advisory, argues that the market is currently at a “behavioral inflection point” after the much-anticipated dovish Fed pivot. In an interview with CNBC’s “Squawk Box Europe,” he highlighted the convergence of momentum, sentiment, and sector rotation fragility as key factors shaping the market’s direction in the coming year. Furthermore, William cautions that the market should rely more on growth numbers rather than inflated valuations.
While the S&P 500 experienced a significant climb, its rally was largely driven by a select few sectors. Information technology stocks surged by 56.4%, followed closely by communication services at 54.4%, and consumer discretionary at 41%. RW Advisory’s analysis points towards a mean risk aversion on U.S. equities due to extreme overbought conditions and a flurry of speculative investment in smaller cap, lower quality stocks towards the end of the year. Short-covering, which involves repurchasing assets borrowed to establish a short position, also contributed to the overall fragility of the market. William speculates that economic sensitive stocks may face pressure if the Fed lowers rates, especially if the market remains in a late-cycle stage where growth disappoints.
In October 2023, the yield on the benchmark 10-year U.S. Treasury note unexpectedly surpassed 5% for the first time since 2007. Central banks’ indications of higher interest rates than the market had anticipated triggered this spike. However, the dovish Fed pivot and increased bets on rate cuts in 2024 caused the yield to plummet to just over 3.9%. Despite the market’s projection of up to six rate cuts from the Fed, William believes bond yields will eventually surpass the 5% threshold as part of a “structural higher for longer trend with rolling waves of volatility.” The recent rate correction and stock rally suggest that much of the positive momentum derived from expected rate cuts is already factored into the market, potentially resulting in the market being overly optimistic about future rate movements. Furthermore, William considers the possibility of a policy mistake and a strong soft landing narrative, which the market currently dismisses, both providing potential inflection points for non-consensus moves.
Given the unsettling geopolitical landscape, gold experienced its best performance since 2020, closing 2023 comfortably above the $2,000 per ounce mark. William predicts that safe haven flows will continue to drive gold prices higher as geopolitical tensions deepen in 2024. He anticipates that the precious metal may break above the $2,700 mark by the end of the year.
As the new year unfolds, the stock market is poised for a potentially challenging period, marked by volatility and uncertainty. The market’s heavy reliance on expected rate cuts and a late-cycle stage of growth may give rise to non-consensus moves. Likewise, the U.S. 10-year Treasury yield is expected to rise above 5% over the long term, despite current market fluctuations. Investors should proceed with caution and closely monitor economic indicators and geopolitical events that may impact the market’s trajectory in 2024.
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