On Friday, January 10, 2025, the U.S. stock market witnessed a plunge despite a positive job report for December 2024. The report revealed impressive growth in the labor market, but the dip in stocks has left investors in a paradoxical dynamic. While the report indicated an economic boom in the coming months, rising Treasury yields have stoked fears of inflation, overshadowing the positive jobs data.
The current market condition might seem counterintuitive. December 2024 saw the fastest labor market expansion since March of the same year. The year was marked by a stark rise in employment across various industries. However, over the past two years, the resilience of the U.S. economy has buoyed equities, while rising bond yields have led to renewed inflation concerns.
Rise in Bond Yields Affect Equities
The yield on the 10-year Treasury note, a key benchmark for U.S. financial markets, surged nearly 80 basis points during the fourth quarter of 2024, marking its fastest climb since 2022. On January 10, 2025, the yield hit 4.79%, a level last reached at the end of 2023. This increase, described as “extremely unusual” by Torsten Slok, chief economist at Apollo Global Management, has created turbulence in equity markets.
Factors driving the surge include “bond vigilantes” protesting fiscal policies, fears of an overheated economy rekindling inflation, and rate increases in Europe and Japan. China remains the sole major economy with stable bond yields.
“Good news is bad news” is a phrase capturing Wall Street’s current sentiment. Investors fear that a robust economy might revive inflation, potentially forcing the Federal Reserve to resume raising interest rates after a period of cuts.
Stock Market Takes a Hit
The S&P 500 dropped nearly 1% for the month as the market closed on January 10, 2025, reflecting losses continuing from December 2024. This decline wiped out early-year gains, leaving the index reeling. Meanwhile, the Nasdaq Composite and Dow Jones Industrial Average registered their steepest drops since mid-December, when the Fed announced its latest interest-rate cut.
Concerns about sustained high borrowing costs and inflation have increased market volatility. Although U.S. GDP has grown at an above-average pace, sectors like housing, manufacturing, and lower-income consumer spending remain areas of concern.
Consumer and Corporate Vulnerabilities Surface
The housing market continues to grapple with mortgage rates exceeding 7%, while commercial real estate borrowers face mounting risks from prolonged elevated rates. Manufacturing activity, closely tied to interest rates, has struggled, as have consumers with lower incomes.
Delinquency rates on credit cards have recently reached their highest level in nearly 15 years. Shares of budget-focused companies like Dollar Tree Inc. reflect this trend, raising concerns about broader economic vulnerabilities.
“There’s also the fear that, at some point in the future, the Fed might have to hike rates again, which has raised the possibility of slower economic growth,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co.
Inflation and Term Premium Complicate the Picture
Inflation might have cooled significantly since its peak in mid-2022, but it appears to have stalled above the Federal Reserve’s 2% target. Over the past few years, market expectations for inflation have climbed, impacting the “term premium” on bonds. In December 2024, the term premium on the 10-year Treasury reached its highest level since 2014.
“People are focusing on the term premium now, and it’s telling you that they want more yield to take that risk,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management.
Economists at Bank of America have further intensified tensions among investors by stating that they do not expect the Fed to cut rates in 2025. This hints at potential inflationary pressure in the near future.
A Mixed Outlook for Investors
Despite recent setbacks, the S&P 500 remains up over 60% since its October 2022 bear-market low. Corporate earnings growth, expected to be strong in the fourth quarter, could provide some relief. According to FactSet’s John Butters, S&P 500 companies are on track to report their best earnings growth in three years, potentially offsetting concerns over inflation and interest rates.
The stock market’s trajectory is likely to be impacted by more economic data, including the consumer price index of December 2024. “It seems as if the general investor just doesn’t believe that markets are good, or will be good in the future,” said Robert Conzo, CEO of Wealth Alliance. “There’s just a very pessimistic tone.”
