Investors showed confidence in the US stock market after a month-long sell-off. The relationship between stocks and bonds has been tense in recent months, with equities falling as Treasury yields climbed to a 16-year high. Higher yields offer investment competition to stocks while also raising the cost of capital for companies and households.
However, the dynamics reversed after the news of smaller than expected borrowing by the US government and signals that the Federal Reserve is nearing the end of its cycle of rates.
The recent stability in Fed rates helped the other asset classes, leading investors to chase yield through year-end.
Yields on the benchmark 10-year U.S. Treasury, which moves inversely to bond prices, are down about 35 basis points from 16-year highs hit in October. Meanwhile, the S&P 500 surged 5.9% in the past week, its biggest gain since November 2022. The index is off about 5% from its July peak, though up nearly 14% year to date.
In addition, active money managers’ exposure to stocks is at its lowest level since October 2022, providing an attractive opportunity for contrarian investors.
The stock’s rebound was fueled by an extremely oversold market, a strong economy and a dovish stance by the Federal Reserve.
Bullish sentiment is bolstered by the US employment data, which suggests the labor market is cooling and supports the case for the Fed to resist further rate hikes.
The US employment data showed a slight gain in the unemployment rate and the smallest wage growth in 2-1/2 years, suggesting that the labor market is cooling, strengthening the case for the Fed to stay its hand. The S&P 500 closed up 0.9% on the day.
Of course, many investors are still hesitant to return to stocks. Technology from Apple Inc. on Thursday was the latest of the market’s massive technology and growth stocks to offer a bearish outlook. The iPhone maker gave a holiday sales forecast that was below Wall Street estimates. At least 14 analysts cut their price targets for the stock, according to LSEG.