As the new year unfolds, a palpable sense of unease blankets Wall StreetA slight recovery was seen in market sentiment on Friday, yet traders across various asset classes have kept their risk appetite in check for most of the holiday periodThis cautious stance has marked much of 2024 so far, contrasting sharply with the bull run that prevailed in the previous yearThe volatility indicators for U.STreasuries and corporate credit have quietly climbed, and the volatility index for stocks surged following an unprecedented year-end downturnThe largest exchange-traded fund tracking Bitcoin has witnessed its gravest outflow on record, signaling a retreat from riskier assets favored by global speculators.

Despite the absence of panic in the market, these actions reflect a cautious sentiment that has been largely missing over the past twelve months, particularly within risk assetsThe combination of economic prosperity and the Federal Reserve’s accommodative policies propelled risk assets to unprecedented heights last year

However, concerns over U.Spolicies and their potential impact on inflation have indeed awakened interest in hedging strategies, causing significant turbulence in the bond market following the largest quarterly rise in the yield of the 10-year U.STreasury in over two years.

For contrarian investors who have been observing Wall Street's reckless behavior for months, these signs of emerging caution are viewed as a healthy restraint on an overheated marketThe recent pullbacks in certain assets, especially equities, starkly contrast with historical trends where the S&P 500 typically rallies in the days following ChristmasThis divergence amplifies the risks associated with preconceived narratives surrounding a second presidential term.

Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, expressed surprise at the market's aversion in the early days of 2024, suggesting there may be a modest uptick by the end of the year

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“Given the potential policy shifts from the incoming U.Sgovernment, scaling back some risks seems prudent,” he noted, highlighting the unpredictable nature of political dynamics.

The yield on the 10-year U.STreasury has remained above the widely observed 4.5% threshold, as traders brace for tariffs that could be implemented as early as this month, introducing an additional layer of risk to the Fed's ongoing fight against inflationBond vigilantes are sounding alarms, warning that any tax-cut agenda could exacerbate fiscal deficits, further complicating the economic landscape.

On Friday, glimmers of optimism appeared as the S&P 500 rose by 1.3%, buoyed by gains in major technology stocks and investor relief over the swift re-election of the Speaker of the HouseHowever, this was juxtaposed against a dip earlier in the week, with U.Sstock markets lingering near the lows they touched after the Fed’s last policy meeting, where officials hinted at a more restrained rate-cutting agenda for the year ahead.

Investor unease about policy uncertainty has prompted a rising demand for safe-haven assets

The Chicago Board Options Exchange’s Volatility Index, which gauges the cost of options on the S&P 500, has risen for the third week in four, while an analogous gauge for U.STreasuries has hit a one-month high, amid heightened turbulence in both high-yield bonds and currency markets.

This prevailing pessimism stands in stark contrast to the excitement witnessed in previous months, where exuberant speculation pushed Bitcoin prices above $100,000 and funneled billions into leveraged ETFsPresently, the iShares Bitcoin Trust ETF, under the management of BlackRock, is facing its longest streak of outflows, with record withdrawals occurring on ThursdayMeanwhile, short-sellers are piling back into large ETFs that track corporate debt.

Amid all this, a risk exposure gauge from the National Association of Active Investment Managers has declined for the third consecutive week, marking its steepest drop since April

Concurrently, a metric from the Chicago Board Options Exchange showed a significant spike in trading volume for bearish put options compared to bullish calls, reaching a near-four-month peak.

This risk-averse atmosphere stands in stark contrast to the optimistic outlook espoused by many Wall Street strategists, with analysts largely anticipating a further 12% rise in the S&P 500 in 2025, following a staggering 53% increase over the past two years.

Max Gokhman, Senior Vice President of Franklin Templeton Investment Solutions, remarked, “The prevailing market sentiment is that equities will continue to scale the wall of worryHowever, we know that the incoming U.Sgovernment has a tendency to build higher wallsSimply put, the obstacles to sustained growth will become increasingly formidable.” While he acknowledges the prevailing optimistic consensus, he emphasizes the wisdom of cautious action and preparing for a tactical retreat.

The level of anxiety throughout the market is on the rise