By Pete Biebel, Senior Vice President
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Yes, it’s that time of year again when I resort to butchering the names of Christmas carols for my titles. One of my favorites from a couple years ago is “Oh Come All Ye Salt Trucks,” which dealt with the question of whether the market would find sufficient traction to keep a winter rally moving higher. Other possibilities for this week were “Here We Come A-Waffling” and “Angles We Have Heard on High.”
While in the end the averages all netted small gains, most of the movement in the stock market last week was to the downside, beginning with back-to-back losses to start the week. The early-week selling was largely driven by reaction to escalating protests in China. The saving grace came midday midweek when Fed Chairman Jerome Powell hinted that the Committee’s target interest rate hike in December might be just 50-basis points instead of another 75-basis point increase. In a market that has been laser focused on Fed policy, Powell’s words were like a choir of angels singing. A rush of buying immediately ensued. The major averages rocketed from near their lows of the week to new recovery highs.
All of the range, and more than all of the gain last week, came in the few hours of trading following the Fed Chairman’s address. In the three hours of trading following the rate policy revelation, SPX ascended nearly 150 points or nearly 4%. In the other 29-½ hours of the week, SPX lost about 100 points.
SPX and COMP saw little net change between Wednesday’s close and the end of the week, though they did hit a fairly substantial pothole on Friday morning. The pre-opening report from the Bureau of Labor Statistics showed not only a much larger-than-expected increase in new jobs in November, but it also included a significant upward revision to the October estimate. The data sparked fears that such a strong labor market might compel the Fed to take a more hawkish bias. The NASDAQ Composite Index (COMP) and SPX gapped lower by more than 1% on the opening. But that was as bad as things got; the averages quickly began to rebound and continued higher through the session, erasing most of the opening losses.
For the week, SPX had a net gain of 1.13% while COMP tacked on a bit more than 2%. Again, the biggest gains among the U.S. equity sectors were in the groups with the poorest year-to-date performance. The Communication Services sector gained nearly 3.5% while the Consumer Discretionary sector added 2.3%. Despite those gains, both sectors are still down more than 25% YTD. Fixed income sectors also had a very interesting week. The powerful positive impact on stocks that followed Powell’s pontification, also pushed bond prices higher and yields lower. The yield on 10-Year Treasury Notes, which was hovering near 3.8% midday midweek, slumped to near 3.5% over the next day-and-a-half. The rally in Treasuries was reflected in higher prices across the bond market.
Two areas that came through the week with surprising gains were Emerging Market equities and precious metals. Both groups have endured significant drawdowns this year and are probably still on Santa’s naughty list. One measure of the stock market in China, which had plummeted more than 60% from its January high to its low last month, soared more than 12.5% last week. One popular index of overall emerging market equities, which had slumped about 40% over the past 10 months, rose nearly 5% last week.
The prices for the shiny metals have been pretty dull this year, especially in light of decades-high inflation. Gold, which had been trading near $1,630 per ounce a month ago, ended the week near $1,811, up 2.5% just last week. The price of silver rose more than 8% last week and has now gained 27% in the past seven weeks.
Last week’s stock market gain extended the (now) seven-week rebound off the October lows. The recent strength has been convincing more investors that a new bull market is underway. The extremely negative investor sentiment in October, which helped to spawn the rally, has now become overly bullish. The AAII Investor Sentiment Bull/Bear reading is back up to near zero. Climbing out of negative ground may not sound like much of a threat, but the current reading is in the area of this year’s highs. The CNN Fear & Greed Index has climbed into the “Extreme Greed” section of its range.
Meanwhile, many professional market analysts are still predicting that lower lows are in our future. Several well-respected analysts, including one well-known “perma-bull,” have published price targets for SPX in the high-2000s, more than 25% below current levels. If they’re going to be right, then the current flight higher should flame-out soon. The next week or two should reveal whether the rebound can extend. We could well see a Santa Claus rally but be aware that the indices have risen to levels at which the Grinch typically appears.
For the first time in nearly eight months, the S&P 500 index (SPX) closed above its 200-day moving average. Coincidentally, the July/August rebound topped out when SPX clanked into its 200-day. Another coincidence is that the July/August rebound ran out of steam shortly after COMP “entered a bull market.” When COMP had rallied 20% off its June low, media outlets were quick to announce that the NASDAQ was in a new bull market. At that time, we warned readers that continuing bear markets can have many such steep but brief “bull markets,” and we advised not chasing the rally. Last week, we heard a similar pronouncement regarding the Dow Jones Industrial Average (DJIA). As of last Wednesday’s close, DJIA was 20.4% above its autumn low. Headlines quickly proclaimed, “Dow Enters Bull Market.” We believe caution is still warranted.
A few weeks ago I wrote, “(SPX) Climbing into the 4050 – 4100 range seems like a reasonable near-term goal.” Now that we’ve clambered into that range, I don’t expect much more upside. At the most SPX might see 4200 – 4250. Moving much beyond that range would make me discount the lower low theory.
The first sign of trouble on the downside would be breaking the short-term uptrend off the October low. On SPX that line currently stands at 3973 and is climbing about 13 points per day. If/when that line is broken, expect the index to drop into the low-3800s fairly quickly. Even the newly initiated bulls should be prepared; if/when 3800 is broken, things could get ugly.
This week brings a very limited schedule of earnings announcements. There will be no schedule speeches by Fed committee members. The one schedule release on this week’s economic calendar that has the potential to roil markets is Friday’s Producer Price Index report.
| Date | Report | Previous | Consensus |
| Monday 12/5/2022 | PMI Composite, November | 46.3 | |
| Factory Orders, October, M/M | +0.3% | +0.7% | |
| ISM Services Index, November | 54.4 | 53.5 | |
| Tuesday 12/6/2022 | International Trade, Trade Deficit, October | $73.3B | $80.0B |
| Wednesday 12/7/2022 | Non-Farm Productivity, Q3, SAAR | +0.3% | +0.4% |
| Unit Labor Costs, Q3, SAAR | +3.5% | +3.3% | |
| Consumer Credit, October, M/M | $25.0B | $27.3B | |
| Thursday 12/8/2022 | Initial Jobless Claims | 225K | 228K |
| Continuing Claims | 1,608K | 1,620K | |
| Friday 12/9/2022 | PPI – Final Demand, November, M/M | +0.2% | +0.2% |
| PPI – FD ex-Food & Energy, November, M/M | 0.0% | +0.2% | |
| Consumer Sentiment, December | 56.8 | 56.8 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market