Closing Thoughts for the Week

If you were waiting for the big year-end Santa Claus rally, you’ll probably need to wait until 2023. Market sentiment has been poor all year and it’s still poor heading into 2023. I’m not encouraged by how Treasuries behaved in December. The last two weeks, in particular, have marked a reversal of the risk-off behavior that had been developing and correlations with equities have turned positive again.

The markets usually head into the holiday break with a sense of relative calm, but there are really no off days. Losses in long-term Treasuries demonstrated that the bond market is still susceptible to the influence of central banks. Elsewhere, there’s little that happened this week to dispute the notion that conditions are still high risk and the markets are still vulnerable to a considerable pullback here.

So what exactly did we learn after everything that happened this week? A couple things. There’s still very much a risk-off tone underlying the markets here. I think Treasuries are telling the story here. One area to watch here might be the junk bond market.