Stocks Sold Off on Friday, Closed Lower for a Second Week on Rising Bond Yields

Traders work on the floor of the New York Stock Exchange on Jan. 10, 2025. Spencer Platt/Getty Images

Business Analysis

U.S. stocks sold off on Friday, led by small caps, ending lower for a second week as global bond yields headed higher for another week.

The S&P 500 ended Jan. 10 at 5,827, down 0.71 percent for the week; the Dow Jones closed at 41,938, down by 1.07 percent; the Nasdaq finished the week at 19,161, down 0.62 percent; and the small-cap Russell 2000 was down 1.9 percent to end at 2,189.

Stocks began the shorter trading week on the bullish side. Techs and small caps rallied on Monday, ahead of the opening of Consumer Electronics Show 2025 in Las Vegas and a very much anticipated keynote speech by Nvidia’s CEO Jensen Huang. But the rally stalled on profit-taking on Nvidia’s shares late morning on Jan. 7, which spread quickly across techs and small caps.

Selling accelerated that afternoon, aided by a report from the Institute of Supply Management (ISM), which showed strong signs of inflation in the U.S. economy’s service sector.

Then, the rise in oil prices continued to the end of the week, reinforcing Wall Street’s fear that inflation may be on the rise again.

The sell-off in stocks resumed on Friday after trading reopened following Thursday’s halt in recognition of the death of former President Jimmy Carter, driven by a couple of reports on the U.S. economy that further confirmed the buildup of inflationary pressures.

One was the labor market report, which showed that conditions remain tight, with robust job growth and a declining unemployment rate. The other was the University of Michigan consumer expectation report, which showed that inflation expectations for the year ahead soared, well above the Fed’s official target of 2 percent.

“Combined with the earlier data this week (like the strong ISM services prices paid report), there is a growing worry on Wall Street that inflation is coming back,” Bret Kenwell, U.S. investment analyst at eToro, told The Epoch Times.

“While a strong labor market is good for the US, there are worries that too strong of a jobs market will put reflation back on the table.”

That makes it less likely that the nation’s central bank will cut short-term interest rates any time soon and may even have to hike them again to contain inflation’s resurgence.

“The labor market is too strong for the Fed to keep cutting, but job losses in cyclical areas like manufacturing suggest we’re experiencing some kind of slowdown,” David Russell, global head of market strategy at TradeStation, told the Epoch Times.

“Health care is masking weakness in other parts of the economy. It’s the opposite of Goldilocks. Forget about rate cuts for now. Higher yields and valuations aren’t typically a great stock mix.”

The prospect of rising short-term interest rates is bad news for the bond market, as higher short-term interest rates drive long-term bond yields higher and prices lower. Thus, the selling of Treasury bonds continued throughout the week, driving yields higher, with the 10-year yields edging closer to 5 percent and the 30-year briefly crossing it.

This time, the sell-off was global. It was led by a spike in UK yields, up 0.25 percent from the previous week and 0.52 percent over the last thirty days, as rising government deficits are adding to the upward pressure on yields.

“Rising bond yields are a natural consequence of inflationary pressures and changing market conditions,” David Materazzi, CEO of automated trading platform Galileo FX, told The Epoch Times.

“Governments have spent heavily in the past few years, and the resulting debt requires financing at increasingly higher costs. For example, in the UK, borrowing costs reaching post-crisis highs reflect not just inflation but broader concerns about fiscal discipline and economic stability.”

Bond yields are the discounting factor in almost every equity valuation model, with valuations falling as bond yields rise, explaining the sell-off seen in equities throughout the week.

“The markets don’t lie: they send signals about what they perceive as risk,” Materazzi said. “Central banks are staying firm on controlling inflation through higher interest rates. It’s a calculated move—inflation is a silent thief of wealth, and taming it is critical, even if it means some economic slowing.”

Paul Stanley, chief investment officer of Granite Bay Wealth Management, a Portsmouth, New Hampshire-based firm with more than $400 million in assets, is cautious about equities for the year ahead.

“Stocks are off to a muted start in 2025, and January’s performance historically correlates to the full year’s performance,” he told The Epoch Times.

“We expect additional near-term market catalysts, including earnings season, CPI data, and additional policy announcements on tariffs once the new presidential administration is in place.”