On Wednesday of this week, the US stock and bond markets were closed due to the Christmas holiday. From the recent performance of the US market, it seems that the yields of US stocks (S&P 500 and Nasdaq), the US dollar, and US Treasury bonds have all shown a trend of rising together. However, many industry insiders are currently questioning whether the trends of these three major markets can still maintain similar synchronicity, especially for the stock market.
A closely watched market observer said on Monday that it may require the cooperation of US Treasury bonds and the US dollar for the stock market to continue to rise smoothly.
Tom Essaye, founder of Sevens Report Research, pointed out in this week's report that based on recent trading levels, the US dollar has only posed a "slight" resistance to US stocks, while the 10-year US Treasury yield has posed a "moderate" resistance. But if the US dollar and US Treasury yields continue to rise from now on, it will cause greater trouble for the US stock market.
Essaye believes that the trend of US bonds and the US dollar may be the key to determining whether the stock market can stand firm in the future.
In summary, a calm foreign exchange and bond market is a necessary condition for the stock market to continue rising, while what we saw last week was exactly the opposite (both US dollar and bond yields rose significantly)
The earlier the US Treasury and the US dollar calm down - with 10-year Treasury yields and the US dollar index falling, the more favorable it will be for the US stock market, and some reassuring data or statements from the Federal Reserve promising to continue cutting interest rates may help achieve this goal, "Essaye said.
Judging from the recent trend, the yield of the 10-year US treasury bond bond once rose above 4.6% on Tuesday, hitting the highest level since the end of May. The bond yield is inversely related to the price trend. The ICE Dollar Index (DXY), which measures the US dollar against a basket of six major currencies, has hit its highest level in over two years.
Despite the calm trading environment before the Christmas holiday and the seasonal positive news of the 'Santa Claus market', the US stock market managed to withstand these pressures during the week. However, it remains to be seen whether the market can continue to rise after the holiday. The major stock indices closed lower on their weekly charts last week, while the Dow Jones Industrial Average remains in the negative return zone so far this month.
An increase in long-term returns is often seen as detrimental to the stock market, mainly because it makes it harder to defend overvalued stocks. A higher rate of return means a lower present value of future profits.
At the same time, some strategists also pointed out that the yield curve of US bonds had completely ended its inversion last week (the yield of 3-month US bonds also began to be lower than that of 10-year US bonds). In other words, the yield curve has completely returned to its normal shape, where long-term returns are higher than short-term returns. This may also have indicative significance for the stock market.
Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, believes that the significance of the end of the inversion between the 3-month and 10-year US Treasury yield curves is that it may indicate that investors finally understand that the low inflation, high growth model that has driven economic development over the past 15 years is giving way to the nominal growth model of inflation.
Shallett wrote, "This indicates that long-term stock valuations will ultimately be pushed down