US stocks and bonds both plummeted on the first day of the year. What signals are indicating a market reversal?

On the first trading day of 2024, both the US stock market and US bonds experienced a "black opening," disappointing traders who had hoped for a continuation of the market's upward trend at the end of 2023.

On Tuesday local time, the yield on the two-year US Treasury bond, which is sensitive to interest rates, rose by 10 basis points during the day, and the benchmark 10-year Treasury yield briefly rose by nearly 10 basis points, reaching a two-week high. However, the yield increase narrowed as crude oil futures narrowed their gains and turned lower.

The three major US stock indexes all opened lower, with the Nasdaq falling nearly 2% at one point and the S&P 500 falling nearly 1%, but later narrowing their losses. In the end, only the Dow managed to close slightly higher.

At the same time, the SPDR S&P 500 ETF Trust (SPY) and the iShares 20+ Year Treasury Bond ETF (TLT) both declined by 0.6%. Although the decline was not significant, it was the first significant decline at the beginning of the year since TLT began trading in 2002.

The simultaneous decline of US stocks and bonds indicates that investors are hesitant to catch up with the rebound in the fourth quarter of last year, as both US stocks and long-term bonds rose by more than 10% in the fourth quarter of last year.

Dennis DeBusschere, founder of research firm 22V Research, said:

The most common concern or idea we hear from investors is that overbought conditions and optimism will reverse in 2024, leading to a reversal in US bond yields and stock returns.

It is difficult to argue against overbought conditions and sentiment indicators.

Behind the rise in bond yields is the pressure on spreads caused by a large number of corporate bond issuances, while traders have reduced their bets on a significant interest rate cut by the Federal Reserve this year.

There are signs that funds may be abandoning recently popular stocks and flowing into cheaper laggard stocks. On Tuesday, the Russell 1000 Growth Index fell by 1.5%, while its Value Index rose by 0.4%.

Tech giants, which were among the biggest winners in the US stock market in 2023, faced selling pressure on Tuesday. The Nasdaq 100 Index fell by 1.7%, marking the third worst performance on the first trading day since the bursting of the dot-com bubble in 2001.

After Barclays downgraded its rating, Apple fell by more than 4% at one point, leading the technology sector lower, while Netflix, Meta (Facebook's parent company), Microsoft, and Alphabet (Google's parent company) all closed lower. In a report, the strategist team at Bank of America, led by Savita Subramanian, wrote:

"The crowding risk of leading stocks in 2023 has already been seen as a major risk for 2024 by many, including ourselves.

It has become a consensus that large-cap tech stocks experienced a sharp decline in January."

According to a previous survey by the media, after the significant rise in 2023, Wall Street strategists believe that the stock returns in the new year will decrease significantly. Fourteen strategists from major companies predict that the S&P 500 will reach 4,881 points by the end of 2024, only about 2.3% higher than last Friday's closing price of 4,769.83 points.