Elliott Wave Options: New Year Fear, Bonds Hinting at Downside?

Markets struggled in the first weeks of 2025. Strong jobs data hints at a strong economy. In turn, that means inflationary pressures remain. So, it’ll be challenging for the Federal Reserve to further cut interest rates this year.

Meanwhile, the bond market has already processed this idea. Bond yields have been rising since September, when the first interest rate cuts were made. As bond yields rise, pressures rise on the stock market.

That’s because stocks and bonds tend to move in opposite directions. As bond yields rise, the attractive yields garner more capital. That leaves less capital for the stock market. And after two years of back-to-back 20%+ returns, investors expect a market pause.

Stocks can still trend higher this year. But rising bond yields act as a tremendous tailwind. Particularly for capital-intensive industries and technology companies.

Given that the market didn’t even face a 10% correction in 2024, investors should continue to tread cautiously. More volatility is the likely outcome in the months ahead. And an early-year market correction can’t be ruled out, even if seasonal trends make an autumn pullback more likely.

For now, investors looking for yield can certainly get it in bonds. The question is how high bond yields will head before peaking. And if the 10-Year Treasury bond tops 5%, stocks may face more immediate downside.

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