U.S. stocks gyrated to a mixed close on Friday as investors headed into the Christmas holiday weekend, having digested cooler-than-expected inflation data which firmed bets for Federal Reserve interest rate cuts in the new year.
All three indexes turned less decisive in light trading as the afternoon progressed, after an initial rally on data showing inflation is easing closer to the U.S. central bank’s target.
A year-end rally in U.S. government bonds has potentially limited further gains in some Treasury maturities, said Rick Rieder, chief investment officer of global fixed income at BlackRock, the world’s largest asset manager.
The Nasdaq joined the S&P 500 in positive territory, while the blue-chip Dow finished nominally lower.
“Some traders are willing to back away late on a Friday in order not to be exposed over a long weekend, and we are in a period of heightened geopolitical risks,” said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder in New York. “But most traders are investors are in the market because this has been a huge rally.”
Small caps handily outperformed the broader market, with the Russell 2000 ending up 0.8%.
All three indexes notched their eighth consecutive weekly gains, the longest weekly winning streak for the S&P 500 since late 2017.
For the Nasdaq and the Dow, it marks the longest streak of consecutive weekly gains since the beginning of 2019.
The S&P 500 is now within 1% of its record close reached in January 2022. Should it close above that level, that will confirm the benchmark index has been in a bull market since bottoming in October 2022.
“In the context of what we’ve seen on a year-to-date basis, it’s actually pretty extraordinary what we’ve seen in the fourth quarter,” said Michael Green, chief strategist at Simplify Asset Management in New York. “Small caps continue their absolute tear.”
“The Russell 2000 has gone from being down on the year as of August to now being up 15.6% for the year,” Green said. “This truly has become an ‘everything’ rally.”
U.S. Treasuries have bounced back from a severe sell-off over the past two months on expectations the Federal Reserve will start cutting interest rates next year as inflation cools and the economy slows. But market bets that the Fed will trim rates by 150 basis points starting as soon as March are overdone, Rieder said in an interview.
The Fed’s economic projections, published earlier this month, projected 75 basis points of interest rate cuts next year.
“To achieve what the market is pricing in, you’d have to have a pretty significant deterioration in some of the indicators like labor, and we don’t we don’t anticipate that,” he said. “I think there’s been this persistent skepticism about the U.S. economy, which I think is overdone.”
Rieder believes that Treasuries at the extreme short and long ends of the yield curve are unlikely to see more meaningful gains after their rapid appreciation of the last several months.
“Much of the 2024 return for the very front end and for the very back end, I think, has already been achieved,” he said.
Benchmark 10-year Treasury yields, which move inversely to prices, have declined from over 5% in October to less than 3.9% this week, and 30-year bond yields have fallen by about 100 basis points from their October highs.
Rieder expects rate cuts of 75 to 100 basis points next year starting in May. Certain parts of the Treasury curve, such as bonds with five- or seven-year maturities, are set to benefit the most from the cuts, with five-year yields possibly declining by 50 basis points or more, he added.
He has moved the interest rate exposure of the BlackRock Flexible Income ETF away from short-term debt and more into the so-called belly of the Treasury curve. The duration of the BlackRock Total Return ETF, which he also manages and which was launched last week, is of about six years, he said.