Daily Market Notes: 12-16-2022

Well, the chickens really came home to roost yesterday, as the market had a completely negative reaction to the fact that investors grew increasingly concerned that the Federal Reserve and other central banks are willing to risk a recession in order to bring inflation under control.

In a day of no mercy for the bulls, the Dow declined by as much as 950 points at the low before steadying a bit with a final loss of 764 down to 33,202 for its worst one day showing in three months. There was only one stock higher and it was the old value-trap VZ which pays a nice dividend but declines by more than that, so who needs this one? Other big losers were the financials like GS plus UNH, MSFT and IBM.

The S&P did worse because it gets the hangover from the large cap tech stocks which always lead the way down with NFLX getting blasted to the downside, in addition to all the other usual suspects. Only 14 of the 500 members were higher and it ended lower by 99 down to 3895. And how about TSLA, which has come down by 250 points and finally was able to eke out a nominal gain of less than a point and most commentators said how wonderful this was after a 63% decline.

The Nasdaq did the worst of all with a 360 point downside shellacking to 10,810 and is in danger of its first losing December in four years, while the Russell 2000 Index of small stocks also got blasted lower to the tune of 45 down to 1774 while the VIX jumped higher to 22.83, still within that lower range and not breaking into the 30’s which is good in a sense.

The wave of selling came as central banks in Europe raised interest rates a day after the Fed hiked the funds rate again, emphasizing that rates will need to go higher than previously expected in order to tame inflation.

The Fed raised rates by half a percentage point on Wednesday, its seventh increase this year. Central banks in Europe followed along Thursday, with the European Central Bank, Bank of England and Swiss National Bank each raising their main lending rate by a half-point Thursday.

Although the Fed is slowing the pace of its rate increases, the central bank signaled it expects rates to be higher over the coming few years than it had previously anticipated. That disappointed investors who hoped recent signs that inflation is easing somewhat would persuade the Fed to ease back on raising rates and this is hurting the economy.

The federal funds rate stands at a range of 4.25% to 4.5%, the highest level in 15 years. Fed policymakers forecast that the central bank’s rate will reach a range of 5% to 5.25% by the end of 2023. Their forecast does not call for a rate cut before 2024.

The yield on the two-year Note rose to 4.24% from 4.21% late Wednesday while the 10-year slipped to slipped to 3.45% from 3.48%.

Even the famous 3-month to 10-year inversion remained and this is the one that is considered a strong warning that the economy could be headed for a recession. And this does away with the possibility of the ‘soft/softish’ landing” that Fed Chair Jerome Powell suggested in a speech last month.

The prospect of more Fed rate hikes have heightened investor worries about upcoming earnings in 2023. The central bank has been fighting to lower inflation at the same time that pockets of the economy, including employment and consumer spending, remain strong which has made it more difficult to reign in high prices.

Weekly jobless claims fell by 20K to 211K which shows that the labor market remains robust at the same time that retail sales fell by more than expected and other reports came in weaker than expected as well (see below). This is the problem that could push the economy into recession as the Fed will keep raising  rates to get the unemployment rate up at the same time that other aspects of the economy are weakening, which unfortunately is a recipe for a recession.

Earnings this week will see: yesterday – LEN lower; today – ADBE and DRI higher while WGO and ACN are lower.

Economic reports will have: yesterday –  November retail sales fell by 0.6% for the lowest this year while ex-autos and gasoline were off by 0.2%, November industrial production dropped by 0.2% for the lowest since September 2021 and capacity utilization was 79.7, December Philadelphia Fed Manufacturing Survey fell to -13.8, December NY State Empire Manufacturing Survey fell by 11.2% to the lowest since August, weekly jobless claims fell by 20K to 211K.

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.