Stocks rang in the new year with a selloff, stalling the 2023 monster rally.
Some investors say that the furious year-end rally has given way to consolidation this week, as traders sell some of their holdings that have ballooned in recent weeks. The S&P 500 index has fallen 1.4% so far this week, the Nasdaq Composite has declined 2.8% and the Dow Jones Industrial Average has lost 0.7%.
That comes after shares of Apple tumbled after Barclays downgraded the stock, dragging down the broader market as other heavyweight tech names declined alongside the iPhone maker. The pain continued on Wednesday, as some of the euphoria about future interest rate cuts faded.
"Given the remarkable end to 2023, it's not particularly surprising that we're seeing a little profit-taking at this stage," wrote Craig Erlam, senior market analyst at OANDA, in a note on Wednesday.
At the beginning of 2023, investors widely expected that sky-high inflation, the Federal Reserve's campaign to tame inflation and a possible recession would culminate in a repeat of 2022's disastrous performance.
Instead, the US stock market was spared a recession and overcame regional banking turmoil, a debt ceiling crisis and geopolitical tensions. The S&P 500 ended last year 24% higher, the Dow rose 14% and the Nasdaq jumped 43%.
Still, investors aren't out of the woods. Recession worries linger on Wall Street, as do concerns about war in the Middle East. The upcoming US election threatens to stir up market volatility, though history shows the S&P 500 index tends to gain during the fourth year of presidential terms.
The steady drain of consumers' savings accounts, whose robust spending helped keep the economy running hot through the Fed's most aggressive pace of rate hikes in decades, could make for a rough beginning to the year, some investors say.
"The first quarter of the year could be a struggle," Alex McGrath, chief investment officer at NorthEnd Private Wealth, wrote in a note on Tuesday.
Inflation has come down but remains above the Fed's 2% target. The labor market is continuing to hum along, but a surprise in any data reports could derail investors' expectations that the central bank will soon begin cutting rates. The December jobs report due Friday could be this year's first test of whether that optimism is warranted. Rising bond yields this week show some doubts remain.
While stocks have reclaimed much of their losses from 2022, some investors have yet to relinquish their caution. Actively managed funds' exposure to traditionally safe consumer staples stocks is still higher than it was at the beginning of 2022, while exposure to the more economically-sensitive consumer discretionary sector is lower, according to Bank of America Global Research.
"Peak recession fears are likely behind us, but positioning still reflects more fear than greed," the bank's strategists wrote in a recent note.
Of course, that doesn't mean the cheer that powered a nine-week rally to finish 2023 is gone. Fund managers are the most upbeat they have been on stocks since January 2022, according to a December survey conducted by Bank of America Securities.
CNN's Fear and Greed Index, which tracks seven indicators of market sentiment in the United States, is at a "greed" reading.
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