By Pete Biebel, Senior Vice President
Coming into last week, the market was going to have to contend with a combination of heavyweight news events on Tuesday and Wednesday: First, Tuesday’s CPI report, then Wednesday’s FOMC policy announcement and press conference. In recent months, those events have triggered bouts of volatility with the averages swinging wildly following each announcement. How well the market rolled with those punches could determine whether the recent rally would go the distance or instead would throw in the towel, perhaps marking the end of another short-term rebound in a continuing bear market.
Coming out of the prior week, the market had been on the ropes. Since the rebound high on 12/1, the averages had been staggering lower like a punched-out palooka. So, it wasn’t too surprising that the major indices registered small gains last Monday to relieve some of the prior week’s oversold condition. But Monday’s action was clearly the undercard. The first of the main events would come the following morning. Early Tuesday, when the BLS report showed November consumer price inflation to be a tick or two less than what had been expected, the stock index futures rocketed higher. Easing inflation numbers meant the Fed might not need to be quite so hawkish. Within the opening minutes of trading, the averages were showing gains of 3% to 4%. The S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) both soared back into the area of their 12/1 highs. Sadly, they were not able to move any higher, and the opening gains eroded over the next several hours of trading. I’ll skip the blow-by-blow commentary; suffice to say the bulls lacked the stamina to continue punching higher. As the market drifted, each tick lower provided more energy for the bears to counterpunch. In the end, what could have been a solidly bullish day ended with a disappointing split decision.
On Wednesday, the averages churned through the morning with small gains, doing a rope-a-dope as the FOMC policy announcement loomed. When the announcement was released, it was instantly clear that the Committee expected higher rates and a longer period of elevated rates than the market was hoping, especially in light of Tuesday’s favorable CPI data. The news landed like a sucker punch uppercut on the market’s glass jaw. Stock prices tumbled. COMP and SPX each fell about 2% over the next hour before recovering some of the losses late in the session.
The beating continued through the last two sessions of the week. Thursday’s gap-down opening was the fault of weaker Retail Sales data and a pair of disappointing updates on the economy’s health. The averages were bleeding red again on Friday; only a last hour bounce kept it from being another very painful day.
My personal gauge for assessing the market’s net take on the two days of CPI/Fed news was to see where SPX wound up at Wednesday’s close relative to where it began at Monday’s close. SPX ended Monday’s session at 3990; after all the bobbing and weaving through the next two sessions, SPX ended Wednesday at 3995. The back-to-back volatility inducing events had the potential to lift the indices to new recovery highs. Instead, it was another split decision; a missed opportunity for the bulls, which in turn, probably adds a little more weight to the current short-term bearishness.
For the week, COMP was down 2.72% after losing 3.99% in the prior week; its year-to-date loss is once again a little worse than 30%. SPX fell a bit more then 2% last week, bringing its two-week loss to about 5.5% and its year-to-date loss to about 19%. Where the sectors with the poorest year-to-date performance (Communications Services, Consumer Discretionary and Technology) were often the best weekly gainers during the market’s recent rebound phase, all three were back among the worst performers the past two weeks.
For the past several months, the market’s interpretation of likely future Fed policy has driven price action. That may be ending. Now that the Fed’s policy likely can’t get more hawkish, expect the market’s focus in the coming weeks to shift to matters such as the degree to which the economy is likely to slow and the magnitude of the likely reduction in corporate earnings.
Two weeks ago, our Marketing folks asked me to write a client-facing piece that described our outlook or expectations for a year-end rally. That piece, Is that You, Santa? outlined why we expect market weakness from early-December into Christmas. I described it as, “…a southerly skid with a couple big midcourse moguls.” Those moguls of course were the anticipated volatile reactions to last week’s CPI data and FOMC statement. So far, so good. But the article did express hope for a Santa Claus rally, which, by definition, traditionally occurs over the final five trading session of the current year and the first two sessions in the New Year. The theory being that, if we were right about weakness into Christmas, then the market could be in good shape for a post-holiday oversold rebound especially if most of the year-end tax-loss selling had already occurred.
No matter how one might draw the lines, the short-term uptrend off the October lows for both COMP and SPX has now clearly been broken. Any short-term rebounds that might be attempted now will likely stall below the 4000 level on SPX. As I expressed in my most recent article two weeks ago, I believe the downtrend could get ugly if the 3800 level is decisively violated. There is still a very real potential for COMP and SPX to fall below their October lows in the months ahead.
Compared to last week’s headline announcements, this week’s calendar offers no economic reports with the potential to spark similar reactions. In what is expected to be a thin, low volume day, the GDP update on Thursday, especially if it contains a negative surprise, could rock the markets. But my pick, pound-for-pound, for the report that has the best potential to trigger a volatile reaction is the PCE release on Friday morning.
| Date | Report |
Previous |
Consensus |
| Monday 12/19/2022 | Housing Market Index, December |
33 |
34 |
| Tuesday 12/20/2022 | Housing Starts, November, SAAR |
1.425mm |
1.400mm |
| Wednesday 12/21/2022 | Consumer Confidence, December |
100.2 |
101.0 |
| Existing Home Sales, November, SAAR |
4.43mm |
4.20mm |
|
| Thursday 12/22/2022 | GDP, Q3, SAAR, Q/Q |
+2.9% |
+2.9% |
| Initial Jobless Claims |
211K |
225K |
|
| Continuing Claims |
1,671K |
1,685K |
|
| Leading Indicators, November, M/M |
-0.8% |
-0.5% |
|
| Friday 12/23/2022 | Durable Goods Orders, November, M/M |
+1.0% |
-0.7% |
| Durable Goods ex-Transportation, November, M/M |
+0.5% |
0.0% |
|
| Personal Income, November, M/M |
+0.7% |
+0.3% |
|
| Personal Spending, November, M/M |
+0.8% |
+0.2% |
|
| PCE Price Index, Y/Y |
+6.0% |
+5.5% |
|
| New Home Sales, November, SAAR |
632K |
600K |
|
| Consumer Sentiment, December |
59.1 |
59.1 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market