U.S. stocks dipped on Monday ahead of crucial job market reports that could influence the Federal Reserve's interest rate decisions.
The S&P 500 slipped by 0.5 percent, while the Dow Jones Industrial Average edged lower by 0.1 percent or roughly 40 points. The Nasdaq Composite fell more sharply, retreating by 0.8 percent.
Bucking the broader market trend, interest rate-sensitive sectors like real estate and small caps advanced on Monday. The real estate sector extended its winning streak to eight consecutive days, while the small-cap Russell 2000 Index notched its fourth straight day of gains.
Wall Street is buoyed by optimism that inflation is waning, allowing the Federal Reserve to moderate its interest rate hikes, and that the economy can avert a recession.
Investors' confidence propelled stocks to a five-week winning streak in November. However, this good news pushed down Treasury yields despite Federal Reserve Chair Jerome Powell's caution against premature expectations of a rate hike halt. On Monday, the 10-year Treasury yield climbed six basis points to 4.28 percent, signaling a shift in investor sentiment.
Economic data releases this week, including the ISM non-manufacturing index and the nonfarm payrolls report, will provide crucial insights into the Fed's interest rate trajectory. A moderating labor market could influence the central bank's monetary policy decisions.
Investors expect Fed rate cuts as soon as the first half of 2024. This could bring significant market volatility as the Fed's policy decisions hinge on the interplay between inflation and economic growth.
Truist co-CIO Keith Lerner warned clients that there's a fair chance the benchmark index doesn't safely land between their "baseline total return" estimates for a 5-10 percent return in the S&P 500.
The S&P 500's year-end surge has propelled the index to its highest closing level of 2023, inching closer to its all-time peak set in January 2022. A decisive break above 4,796.56 would officially mark the start of a bull market, according to a widely accepted definition.
This year, the benchmark index has gained 19.7 percent, rebounding 28.5 percent from its October 2022 trough. The index capped off its strongest month in over a year and reached its highest point in over a year last Friday.
In an interview with Yahoo Finance, RBC Capital Markets head of U.S. equity strategy Lori Calvasina said she anticipated further pullbacks as investors await key economic data releases.
"It would not be surprising to me to see the rally [of stocks] take a breather at some point in time, and that does not mean you have to be doom and gloom for the next 12 months," said Calvasina.
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Information Technology and Consumer Discretionary declined by around one percent, weighing on the wider market. Tech giants Microsoft and Apple led the retreat, with stock prices slipping by 2.9 percent and 1.1 percent, respectively.
Spotify jumped 9.6 percent after announcing its third round of layoffs for the year, a move seen as a cost-saving measure to improve profitability. Meanwhile, Uber gained 5.6 percent on news that the ride-hailing service will be added to the S&P 500 index.
Alaska Air Group experienced a significant drop of 16.8 percent following its announcement to acquire Hawaiian Airlines in a $1.9 billion deal. The decision raised concerns about the Biden administration's stance on airline industry consolidation.
In contrast, Hawaiian Airlines' stock soared by 190 percent as Alaska Air offered to pay nearly four times its Friday closing price.
Following Wall Street's retreat, Asian stocks also dipped to their lowest levels in three weeks, while Hong Kong's Hang Seng index plunged to a one-year low.
MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was down one percent, with Hong Kong doing most of the dragging with a 1.6 percent fall. The Hang Seng index closed at its lowest level in a year, down 1.7 percent.
Japan's Nikkei (.N225) was 1.4 percent lower at a three-week trough, primarily thanks to falling chipmaking stocks.