By Pete Biebel, Senior Vice President
In the words of Bob Dylan, “Well, it ain’t no use to sit and wonder why, babe.” Investors may be tempted to fret over the stock market acting like a bipolar steamroller, but so far, so good. Having the market change its mind so radically within a few days may be confusing but hang in there. The market juggernaut chugged higher again last week, although it did display some manic behavior midweek. The NASDAQ Composite Index (COMP) mowed down the bears and racked up a net gain of a bit more than 8% for the week, and that net gain included a 2.5% loss, which it suffered when it veered off course on Wednesday. So, yes, the market had a couple extreme mood swings last week: A bullish start to the week interrupted by a bout of election complexion disaffection followed by two very positive sessions, powered in large part by inflation elation.
Confused? The doctor will see you now. To set the scene, recall that, coming into the week, the stock market was fearful of continuing Fed hawkishness but also hopeful that the Committee would soon have reason to reduce the pace of its rate hikes. A more immediate concern was Tuesday’s midterm election. While the prospects for a Red Sweep faded significantly in September and October, the odds of the Republican party taking control of both the House and Senate were looking much better as Election Day approached. With this all coming off a week in which the market was trying to rebound after having been rocked by hawkish Fed comments, it was a prescription that could produce some dangerous side-effects.
The market was in an effervescent mood to start the week. Stocks posted big gains on Monday ahead of Tuesday’s vote, propelled by the increasing likelihood of a split Congress. The temperament dimmed a bit on Tuesday, but the averages were still able to stagger through the session to small net gains. Wednesday morning woke up to a full-blown, high anxiety panic attack. The anticipated Red Wave turned out to be barely a pinkish ripple. The early returns were hinting that Republicans would gain just a very narrow edge in the House of Representatives and that they would fail to take a majority in the Senate.
The mood swing was sudden and significant. Stocks gapped lower on the opening and remained in a funk for the balance of the session. The major averages all ended near their lows of the day with losses of 2% to 2.5%. Both COMP and the S&P 500 Index (SPX) had given up their Monday/Tuesday gains and had plunged into the red for the week. Wednesday’s loss may have generated a little extra angst due to the market’s fragile state. If follow-through losses occurred, that would be a strong argument that the rebound rally from the October lows had run its course and lower lows were now likely.
The sense of relief the market felt following the CPI data on Thursday morning was almost audible. The market instantly swung from deep despair to giddy optimism. That morning, the Labor Department reported that their headline inflation index increased 7.7% year-over-year, much less than expected and well below the previous month’s 8.2% rate. Core CPI, which excludes the food and energy components, also came in better than expected. The year-over-year increase in Core CPI was 6.3% in October, three ticks less than the September rate.
The CPI data was just what the psychiatrist ordered. A euphoric wave of buying sent stocks steeply higher on the opening. The previous day’s loss was a mere hallucination. The opening print on both COMP and SPX was above Tuesday’s high, and those prints proved to be the lows of the day. By the end of the day, COMP had gained 7.4% and SPX was higher by 5.5%. For both indices, those were their best single-day percentage gains since the early days of the rally off the pandemic lows in 2020.
Thursday’s euphoria carried into Friday. The major averages again posted healthy gains and again ended near their highs of the day. For the week, SPX added 5.9%; COMP rallied 8.1%. For COMP, it was its largest two-day gain in 24 years. Among the U.S. equity sectors, two of the worse performing groups year-to-date were the biggest gainers last week. The Technology sector surged a bit more than 10%, reducing its loss for the year to about 23%. The Communication Services sector posted a 9.41% gain; its YTD loss now stands at 35.61%. Even the poorest performing sectors, Utilities, Healthcare and Energy, had gains of between 1% and 2%. The Energy sector was held back by declining crude oil prices. The price of a barrel of crude fell from above $93 on Monday to below $85 on Thursday, though it had climbed back to near $89 on Friday.
The CPI celebration carried through to the bond and currency markets. The yield on 10-Year Treasury Notes, which began the week at 4.2%, dropped to near 3.8% by the end of the week with the bulk of that decline coming in the hours after the CPI data. The lower rates contributed to a weaker U.S. Dollar. The Dow Jones Dollar Index fell about 4.5% from Thursday morning to Friday’s close.
In my most recent article two weeks ago, I reminded readers that some of the steepest market rallies come as rebounds in continuing bear markets. Last week’s big gains only added to the schizophrenic outlook. Is it a new bull market, or just a bear in a bull costume? SPX ended last week just below 4000. Climbing into the 4050 – 4100 range seems like a reasonable near-term goal. Watch for resistance near 4080; that’s the area of an old gap and the declining 200-day moving average. If SPX can climb beyond about 4150, that would be a strong argument that a new bull market has begun.
SPX would need to drop below the 3800 level before the decline would cause any anxiety. I still believe that, if SPX falls below 3700, then new lows will be very likely.
Prominent on this week’s economic calendar is tomorrow’s Producer Price Index report. Based on the recent spastic reactions to inflation data, we should be prepared for the potential that the PPI report could trigger another major mood swing.
| Date | Report | Previous | Consensus |
| Monday 11/14/2022 | No Reports Scheduled | ||
| Tuesday 11/15/2022 | PPI – Final Demand, October, M/M | +0.4% | +0.5% |
| PPI Ex-Food & Energy, October, M/M | +0.3% | +0.4% | |
| Empire State Manufacturing Index, November | -9.1 | -7.6 | |
| Wednesday 11/16/2022 | Retail Sales, October, M/M | 0.0% | +1.0% |
| Retail Sales Ex-Vehicles & Gas, October, M/M | +0.3% | +0.2% | |
| Import Prices, October, M/M | -1.2% | -0.4% | |
| Export Prices, October, M/M | -0.8% | -0.2% | |
| Industrial Production, October, M/M | +0.4% | +0.2% | |
| Business Inventories, September, M/M | +0.8% | +0.5% | |
| Housing Market Index, November | 38 | 36 | |
| Thursday 11/17/2022 | Housing Starts, October, SAAR | 1.439mm | 1.410mm |
| Building Permits, October, SAAR | 1.564mm | 1.516mm | |
| Initial Jobless Claims | 225K | 222K | |
| Continuing Claims | 1,493K | 1,509K | |
| Philadelphia Fed Manufacturing Index, November | -8.7 | -7.0 | |
| Friday 11/18/2022 | Existing Home Sales, October, SAAR | 4.71mm | 4.36mm |
| Leading Indicators, October, M/M | -0.4% | -0.4% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market