Futures for the S&P 500 Indicate a Muted Start to the Year as Bond Yields Tick Higher

U.S. stocks began the new trading year on a downward trend, erasing some of the gains from the remarkable 2023 rally that left the S&P 500 index just short of a new record. The market's performance on Tuesday morning reflected a negative sentiment, with key indices experiencing declines.

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Specifically, the S&P 500 saw a drop of 29 points, or 0.6%, landing at 4,740. The Dow Jones Industrial Average lost 6 points, settling at 37,683, while the Nasdaq Composite decreased by 229 points, or 1.5%, reaching 14,781. This follows the trend from the previous Friday, where the Dow declined by 21 points, the S&P 500 decreased by 14 points, and the Nasdaq Composite dropped by 84 points.

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Several factors contributed to the market movement. Soft economic data from China raised concerns about the global economy's health, and increased tensions in the Middle East led to rising oil prices. An analyst downgrade for Apple Inc., part of the so-called Magnificent Seven, further impacted market sentiment.

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The start of 2024 appears turbulent after the strong finish to 2023, during which the S&P 500 recorded its ninth consecutive week of gains, although it had not revisited its early January 2022 record close of 4,796.56.

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Recent data on the U.S. economy indicates a slowing pattern, with November's construction spending up by 0.4%, falling below the expected 0.6% increase. Despite not meeting expectations, this marks the 11th straight month of construction spending growth. The S&P manufacturing purchasing managers’ index for December was 47.9, slightly below the initial 48.2.

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Investors are eagerly awaiting the release of key economic data throughout the week, with the December jobs report from the Labor Department scheduled for Friday. A forecasted addition of 170,000 jobs is anticipated, down from the 199,000 jobs added in November.

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Apple's stock downgrade to underweight from neutral contributed to a 3% decline in early trading, reflecting concerns about weakening consumer demand. The international market scenario also influenced investor sentiment, with Hong Kong’s Hang Seng dropping 1.5%, the Shanghai Composite dipping 0.4%, and Japan's Nikkei 225 falling by 0.2%, partly in response to a deadly earthquake along the western coast.

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Geopolitical tensions heightened as Iran announced its intention to send a warship to the Red Sea in response to the U.S. Navy's actions against Tehran-backed Houthi militia boats. Brent crude rose 2% to trade above $78 a barrel, raising concerns about potential inflationary pressures due to higher energy costs.

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The 10-year Treasury yields increased by 8.1 basis points to 3.962% on Tuesday, possibly influenced by concerns that easing inflation may lead to interest rate cuts. Despite the recent bond market supporting stocks, uncertainties persist, with traders in derivative markets expecting 150 basis points of benchmark rate cuts in the coming year, according to the CME’s FedWatch tool.

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Analysts maintain a generally positive outlook, with historical trends suggesting the potential for further gains, even though the initial tests of investor resilience are anticipated during the month. Richard Hunter, Head of Markets at Interactive Investor, emphasized the stage being set for continued momentum, though challenges may arise early in the year.