Wall Street’s final session of 2023 saw stocks taking a breather near all-time highs. For bulls defying every doomsday scenario, that was just a blip for a market notching its longest weekly advance since 2004.

The uneventful Friday before the holiday had equities halting a five-day advance. Signs of exhaustion have emerged after a more than US$8 trillion surge in the S&P 500 this year. Despite concerns ranging from Federal Reserve uncertainty, recession jitters and geopolitical risks, the gauge notched its ninth straight week of gains.

“The market shows signs of fatigue and undoubtedly needs to consolidate,” said Quincy Krosby at LPL Financial. “As long as participation remains broad, the bullish sentiment should carry the indexes as they navigate geopolitical and domestic scenarios, and an overarching positive consensus that 2024 will be a similarly strong year.”

The S&P 500 saw a mild loss, remaining very close to its January 2022 record. Fueled by the artificial-intelligence boom, stretched positioning and the “fear of missing out,” the gauge has climbed 24 per cent in 2023, while the Nasdaq 100 had its best year since 1999.

After a year of massive swings and numerous head fakes, the U.S. 10-year yield ended 2023 almost exactly where it began. It’s an almost farcical conclusion to 12 months of trading that saw it tumble to as low as 3.25 per cent in the wake of March’s banking crisis — only to surpass 5 per cent just a few months later.

Benchmark 10-year rates rose to almost 3.9 per cent on Friday. The greenback was little changed on the day, but posted its worst year since the onset of the pandemic. Oil saw its biggest annual drop since 2020.

Key inflation data endorsing a growing narrative that central bankers will aggressively cut rates in 2024 have fueled solid gains for both equities and bonds over the last two months. The rally has also been driven by Fed Chair Jerome Powell’s dovish pivot at the December policy meeting.

“The notion that the major central banks have surely done enough to quell the inflationary surge of 2022-23 is powering the rally,” said Brian Barish at Cambiar Investors LLC. “It’s not hard to imagine new things for the markets to be concerned by, such as elections, the sizable bond funding requirements of the U.S. government, and/or any notion that inflation resurges anew. But for now, there’s not much news and not a lot of sellers.”

Former Treasury Secretary Lawrence Summers said investors are probably underestimating inflation risk as markets move swiftly toward expectations for Fed easing.

“I think there’s still a risk that the market is probably underestimating: that we’re not going to quite make as much progress on inflation as people hope, and that there’s not going to be quite as much room for Fed easing as people hope,” Summers said on Bloomberg Television’s Wall Street Week with David Westin.

Equity markets have gone up so quickly that they’re highly vulnerable to a pullback if the U.S. economy slips into even a mild recession, according to RBC Global Asset Management. Rate cuts are likely to happen in 2024, but the global economy hasn’t yet absorbed the full impact of almost two years of tightening, RBC economist Eric Lascelles said.

“What’s baked into the cake is a sizable jump in earnings, which is really only achievable in a soft-landing scenario,” Lascelles said.

The lack of anxiety is also visible in the market’s favorite volatility gauge — the VIX — which has held below 13 this week, near pre-pandemic lows and well below the five-year average. That low reading “could be suggestive of a degree of investor complacency, even exuberance,” said Russ Mould, investment director at AJ Bell.

“Momentum remains overbought but bullish,” said Adam Turnquist at LPL Financial. “While extremely overbought conditions raise the odds of a temporary pause or pullback, longer-term returns have been positive and above average based on comparable periods.”

Following a nine-week winning streak, the S&P 500 has posted average and median 12-month forward returns of 8.1 per cent and 12.2 per cent, respectively, Turnquist at LPL said, citing data going back to 1950. Seven out of nine occurrences produced positive results, he noted.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.4 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World index fell 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.2 per cent to $1.1039
• The British pound was little changed at $1.2744
• The Japanese yen rose 0.2 per cent to 141.07 per dollar

Cryptocurrencies

• Bitcoin fell 1 per cent to $42,042.01
• Ether fell 1.8 per cent to $2,304.86

Bonds

• The yield on 10-year Treasuries advanced three basis points to 3.88 per cent
• Germany’s 10-year yield advanced eight basis points to 2.02 per cent
• Britain’s 10-year yield advanced four basis points to 3.54 per cent

Commodities

• West Texas Intermediate crude fell 0.6 per cent to $71.36 a barrel
• Spot gold fell 0.1 per cent to $2,063.18 an ounce