Despite the November P.P.I coming in higher than expected, the market sort of held up nicely as after a lower opening in reaction to the report, the major indices actually had the nerve to move higher by midday. As an example, the S&P was ahead by 14 while the Nasdaq did even better with a 56 point advance at that time. The Dow lagged as it could only get nominally positive due to declines in AMGN, CVX, HD and UNH.
So by 3:15pm things looked like they would do alright considering the news in the 8:30am report, but starting at that time, the indices cratered very badly into the close as the Dow turned a 79 point loss into a final decline of 305 to end at 33,476. The S&P turned a 2 point loss to a final one of 29 down to 3934 while the Nasdaq, which was trying to hold the fort, so to speak, turned a 7 point gain at the time into a final loss of 77 down to 11,004.
The Russell 2000 Index of small stocks had nothing going for it and finished 21 points lower at 1796 while the VIX, which began the week at 19.06, a definite warning sign that equities were in trouble, ended at 22.83 on the overall weekly declines as the Dow, which has held up better than the other indices so far this year, put in its worst week since September as it joined its brethren in the misery that 2002 has produced. On the other hand, it was the first losing streak in the past three.
And as I have stated before, while so many “experts” were certain that the S&P was on its way higher after it closed above its 200-day moving average late last week after an 8% gain in October and a 5% advance in November which got it to that above the 200-day average, why do you wait until the S&P rallies 13% and then get bullish as isn’t a person supposed to buy when things are low and sell when they get higher. It is the same thing when the S&P breaks below the 200-day MA and then the “experts” say that it is now time to sell because of the supposed technical breakdown as shouldn’t one be selling when things are higher instead of waiting for a lower level to get bearish?
The P.P.I. report came in at 7.4%, which was a slowdown from October’s wholesale inflation rate of 8.1%, but it was still slightly worse than economists expected. This could mean that the Fed is going to continue to push harder in order to get inflation more under control.
The high inflation, along with the Federal Reserve’s economy-crunching response to it, have been the main reasons for the market’s tumble this year. Stocks have recovered some of their losses recently, as inflation has slowed since hitting a peak in the summer. But it remains too high, raising the risk the Federal Reserve will have to keep hiking interest rates sharply to get it fully under control.
Treasury yields climbed in response to this report as the 10-year Note got up to 3.57% while the 2-year Note ended at 4.33% which narrowed in the yield curve which got as high as 83 earlier in the week. This situation does not bode well for the possibility of a recession in 2023.
Households are forecasting inflation of 4.6% in the year ahead, according to the December mid-month University of Michigan Consumer Sentiment Survey, which is the lowest such reading in 15 months, though still well above where it was two years ago. Expectations for longer-run inflation remain stuck in the 2.9% to 3.1% range where they have been for 16 of the last 17 months, at 3%.
The overall report came in stronger than expected with a reading of 59.1, which was the highest in 15 months, which is good news for the economy which gets most of its strength from spending by such consumers. But it can also complicate the Fed’s task. If such spending remains resilient, it could keep up the pressure on inflation. So in a sense the market is being hurt by the old “good news is bad news” syndrome once again.
There will be two huge events this week with Tuesday’s November C.P.I report which is one day before the next interest rate decision, now expected to be 50 basis points after four straight rises of 75. The projection is for inflation slowing to 7.3% last month from 7.7% in October.
Earnings this week will see: today – COUP; tonight – ORCL; Wednesday – LEN; Thursday – ADBE, JBIL; Friday – WGO, DRI and ACN.
Economic reports will have: Tuesday – the all-important November C.P.I; Wednesday – November retail sales, November industrial production and capacity utilization, December Philadelphia Fed Manufacturing Survey, Fed interest rate raising decision.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.