Last Week On Wall Street Growing optimism that the Fed may be ready to ease future interest rate hikes sent stocks higher in a quiet trading week. The Dow Jones Industrial Average gained 1.78%, while the Standard & Poor’s 500 added 1.53%. The Nasdaq Composite index improved 0.72% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 2.33%. Stocks Rally In light holiday-week trading, stocks rallied as investors grew more hopeful of a slowdown in a future rate hike. The release of the minutes from the early November meeting of the Federal Open Market Committee (FOMC) fed investors' optimism. Fed officials suggested such easing may be coming soon. Investor sentiment was also lifted by unexpectedly strong retailer earnings, upside surprises in new economic data, and a better-than-expected consumer sentiment reading. Investors looked past the continuing Covid-related challenges that have stymied China's economic recovery and its attendant implications for global growth. Easing in the Offing? The Fed meeting minutes, released before the Thanksgiving holiday, showed that most Fed officials felt a slowing in interest rate increases would be appropriate. The minutes also suggested that such a deceleration in rate hikes may begin with December's meeting with a 50 basis point hike rather than a fifth consecutive boost of 75 basis points. The primary reasons for slowing the pace of rate hikes were the growing risk that the Fed may increase rates beyond what was required to reduce inflation to its two percent target and signs that inflation pressures were easing. This Week: Key Economic Data Tuesday: Consumer Confidence. Wednesday: Gross Domestic Product (GDP). Automated Data Processing (ADP) Employment Report. Jobs Openings And Labor Turnover Survey (JOLTS). Thursday: Jobless Claims. Purchasing Managers’ Index (PMI) Manufacturing. Friday: Employment Situation. This Week: Notable Companies Reporting Earnings Tuesday: Workday, Inc. (WDAY), Intuit, Inc. (INTU), CrowdStrike (CRWD). Wednesday: Salesforce, Inc. (CRM). Thursday: Marvell Technology, Inc. (MRVL), Dollar General Corporation (DG), The Kroger Co. (KR). Final Thoughts Well, the market gave up last week’s gains today. This isn’t the end of the world as we’ve learned this market moves in fits and starts. We’ve moved quite a bit higher from the October lows. Some of the more optimistic analysts still think we can go a fair amount higher into year end. Let’s hope Santa is good to us, but Christmas for the market won’t be on December 25th this year. It will be on December 13 and carry over to the 14th when we find out if Santa is bringing us all the things we want or is giving us a lump of coal. Why the 13th and 14th? Well, November CPI comes out December 13 and the Fed makes their next announcement on interest rates. In November we got a cooler than expected CPI number and the market jumped 5%. We expect inflation to continue its descent as many of the items that were highly inflationary are coming down. Don’t look now, but oil has round tripped for the year. We went from the mid $70 to $130 and as of this writing back to the mid $70s. Sure, not everything we buy is declining in price, but the pace of ascent has slowed. The Fed’s fastest pace of rate hikes in history is working. So much so that they have discussed slowing their pace of rate hikes to give the economy time to catch up. This is what is expected in December. A half percent rate hike instead of the three quarters of a percent we’ve seen at the past several meetings. And, if CPI continues to cool they may be able to take a breath at the next meeting and see where things are. The economy is cooling and those big rate hikes take time to work their way through the system. The Fed has been barreling down the rate hike road looking in the rear-view mirror. If you were to drive down the highway doing the same you know the eventual outcome; you are going to have an accident. If inflation is coming down like many believe, the Fed needs to take a breath to shift their eyes from the rear-view mirror to the windshield. So, like I said, make or break for the market this year comes mid-December. There aren’t really any other material catalysts between now and then. Absent Russia making peace with Ukraine (which would be good for markets) there isn’t anything more important to stocks for the remainder of the year. Having said all that, and it was a mouthful, investor sentiment, as I’ve stated many times, is about as bearish as I’ve seen it. So, some good news here could go a long way to regaining some ground in the markets as many would be on the wrong side of the table just as they were when the last CPI number came out. This is why the market jumped 5% in a day. The crowd is usually wrong. Our friends at Fundstrat shared the following charts with us. Think about where the markets were at the extremes on these sentiment charts and where they went from there. We are at levels below 2008 and this is in no way like 2008. We were all there. Big banks were dropping like flies and the Fed was engineering shotgun weddings among financial companies to keep them solvent.
To play devil’s advocate for a moment, CPI could come in hot. If it is higher than expected it would be bad for the market. I don’t believe that is the case at this time nor does the data point to it, but it could happen. Also, the Fed is engineering a recession. It is going to happen if we aren’t in it already. Everyone says corporate earnings will decline and this must bring the markets lower. That is all well and good, but just so you know, on average, markets bottom 11 months prior to earnings troughs. It could be different this time. No one has a crystal ball. No doubt earnings will come under pressure. If the Fed goes too far then all bets are off in the short-term. I don’t think they want to go to far. I really think Powell and company want to have a legacy of getting us through Covid and taming the inflation they created without blowing up the economy. They will continue to talk tough. They must project a firm posture. However, like almost anything else, talk is cheap. Actions speak volumes, so pay attention to what they do and what is in their official statement. Markets are emotional because humans are emotional. They will react to jawboning in the short term, but fundamentals tend to prevail over time. The economy is cyclical and it is normal to expand and contract. Great businesses do what they must to make it through these cycles and flourish in the times ahead. I have no doubt this time will be different from any other. So, in the near-term be on your best behavior. Santa is checking his list twice and come mid-December if CPI makes it onto the “nice” list you’re going to want to leave him extra milk and cookies for his efforts. Stay tuned…
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THIS WEEK'S UPDATE
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November 29, 2022
