Bad News? The Worse the Better!

Dec 13, 2022

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President
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Inflation held its place as the most talked about phenomenon in the markets last week as the Producer Price Index (PPI) – a measure of wholesale price changes – rose more than expected when it was released on Friday. For those of us who watched the markets closely last week, it felt as though everything that happened on the prior four days was just a build-up to the next reading of inflation. Investors had hoped that PPI would show the same improvement that the last Consumer Price Index (CPI) reading did – a clue that the Federal Reserve’s rate hikes are having their intended effect. My view is that until the Fed officially ends their rate-hiking campaign, markets are unlikely to move much higher. At the same time, the rate hikes have pushed the U.S. Treasury yield curve into an inverted position – a condition that has preceded each of the last nine U.S. recessions, further complicating the case for markets to rally.

As you may have guessed, market sentiment has deteriorated over the last several days and many market strategists have begun to cut their forecasts for 2023 to reflect lower expectations for economic conditions and corporate profits. Stocks finished sharply lower last week thanks to increased worries about a looming recession. The S&P 500 Index (SPX) lost 3.4% for the week while growth and small-cap stocks fared even worse. The Technology-heavy NASDAQ Composite (COMP) shed 4%, while the Russell 2000 small-cap index lost 5.1%. The shift away from growth and small-cap stocks reflects a move toward areas of the market that investors perceive as a safe haven in a potential recession. Larger, more established companies tend to have more sustainable profits and can be less volatile as a result. Bonds didn’t fare much better last week as yields rose in response to the hotter-than-expected PPI reading.

Last week marked the worst week for major indices since September as stocks experienced particular weakness in the first two sessions of the week. Monday saw the ISM Services Index come in better than expected and was a case of “good news is bad news” as it appears the services side of the U.S. economy remains strong. The data led to renewed worries that the Fed still has a long way to go in their effort to slow the economy and tamp down inflation. SPX lost 1.8% as the Energy, Consumer Discretionary, and Financials sectors led the move lower. The CBOE Volatility Index (VIX) shot up nearly 9% Monday. Tuesday saw similarly weak trading as recession fears continued to creep into the minds of investors despite an otherwise quiet day for economic indicators. SPX fell 1.4% while COMP lost 2% as growth continued to lag as investors shifted toward defensive sectors.

Wednesday saw stocks close flat to slightly lower in what was a choppy session for stocks. The consensus view is that the Fed will continue to hike rates at a slower pace into 2023 before pausing and potentially cutting rates into 2024. The issue is that the Fed can’t seem to make sustained progress toward their goals and each week some member of the Federal Open Market Committee manages to make a statement that contradicts what another member said a few days prior. Oil prices continued to fall on Wednesday and marked their lowest level of 2022. Crude prices peaked at nearly $140/barrel in the spring and are currently trading just under $80/barrel. This has been a positive development for consumers (lower gas prices are always appreciated) and for inflation readings, but the reason that oil prices have fallen is less positive. If there is a recession, demand for oil will decline as there will be less need to produce crude oil in a slowing economy. Energy stocks have been one of the few bright spots in the market so far in 2022 because they have seen record profitability thanks to soaring prices. Most oil producers will remain comfortably profitable with crude oil in the $70s/barrel but they won’t be printing money the same way they were just a few months ago. Without the effect of record earnings for Energy companies, the S&P 500 would be on track for negative earnings growth in 2022.

The final two days of the week were a wash with Thursday seeing a move higher and most of that gain given back on Friday. SPX gained 0.8% Thursday as jobless claims moved higher in a continuation of the good news is bad news and bad news is good news posture that investors have taken. Thursday’s jobless numbers were the highest they’ve been in 10 months and present a mixed view when considered relative to last week’s employment report that showed strong hiring and wage gains. Markets fell once again to round out the week as the previously mentioned PPI reading weighed on investors’ minds. In contrast to disappointing PPI, consumer sentiment ticked up on Friday as gas prices (which are closely tied to consumer sentiment) fell. Focus quickly shifted toward this week’s Consumer Price Index (CPI) announcement, which will help clarify if the latest PPI reading was a fluke or if inflation has turned higher once again.

The coming week has a full slate of notable data releases. Tuesday will bring a closely watched reading of inflation when the Consumer Price Index is released. Tuesday will also be the first day of the Federal Reserve’s two-day policy meeting and Fed Chairman Powell’s comments on Wednesday will be the highlight of the week. Finally, updates to manufacturing and services Purchasing Managers’ Index will be closely watched for insight into economic conditions on Friday morning.

Date Report Previous Consensus
Tuesday 12/13/2022 NFIB Small-Business Index 91.3 90.5
Consumer Price Index (y/y) Nov. 7.8% 7.3%
Core CPI (y/y) Nov. 6.3% 6.1%
Wednesday 12/14/22 Import Price Index -0.2% -0.5%
Federal Reserve Press Conference with Chairman Powell
Thursday 11/24/2022 Initial Jobless Claims 230,000
Continuing Jobless Claims 1.67M
Retail Sales 1.3% -0.3%
Industrial Production Index -0.1% 0.2%
Capacity Utilization Rate 79.9% 79.8%
Friday 11/25/2022 U.S. Services PMI 46.2
U.S. Manufacturing PMI 47.7


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