Daily Market Notes: 12-19-2022

The market ended the week on Friday with another awful performance, with the realization that the Federal Reserve and other central banks are willing to bring on a recession if this is what it takes to crush inflation and unfortunately this could get the economy into a “hard landing” along with stagflation in the process. These are not pleasant choices, but we have to recognize things for what they are.

The indices never had a chance, as they opened lower and just kept sinking as the session moved along and ended lower for the third straight session with their second straight weekly decline.

As a result, the Dow gave back 281 down to 32,920 led by losses in AXP, HD, MCD, MSFT and UNH. But it did come back from its worst level which was down by 550 as gains in AMGN and CAT helped. The S&P on days like this always does worse because it gets caught by declines in the large technology stocks and it ended lower by 43 down to 3852. It is now lower by 18% for the year. The Nasdaq lost 105 to 10,705 but did show some spotty signs of progress with ADBE ahead on good earnings while META was higher on some upgrades.  This index is now down by 31% for the year.

The Russell 2000 Index of small stocks followed along to the downside with an 11 point decline to 1763 while the VIX did the market no favor by once again declining to 22.62 despite the indices selling off fairly sharply and this is the worst possible combination because if the market is going to go lower, at least let the VIX go higher into the 30’s in order to create more of an oversold situation so that there could be a more sustained recovery.

And once again, the negativity has come about as the Fed last week raised its forecast for how high it will ultimately take interest rates, namely now to 5.1% and tried to dash hopes that rate cuts may happen next year. In Europe, the central bank came off as even more aggressive in many investors’ eyes.

A mixed report from S&P Global highlighted the recession risk. It showed that business activity slowed more than expected this month as inflation squeezes companies. It also noted that it was the sharpest drop since May of 2020, but that inflation pressures have also been easing.

Bond yields were mixed with the 10-year yield rising to 3.49% from 3.45% late Thursday. The yield on the two-year Note fell to 4.21% from 4.24% late Thursday. This narrowed the yield curve in somewhat.

And once again to illustrate the headwinds that the market faces going forward is that the Fed on Wednesday ended its final meeting of the year by raising its short-term interest rate by 50 basis points for its seventh straight increase this year. Investors had been hoping that the central bank would signal an easing of rate increases heading into 2023, but they instead signaled the opposite.

And what Powell had to say really puts some caution into equities going forward – “Reducing inflation will require a sustained period of below trend growth and some softening of labor market conditions. The historical record cautions strongly against prematurely loosening policy and we will stay the course until the job is done.”

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 and this is opposite to what most investors had expected.

This week sees the following earnings: Tuesday – Dow component NKE, FACT, FDX, GIS; Wednesday – CCL, CTAS, MU; Thursday – KMX, PAYX.

Economic reports will have: today – Home Builders Housing Market Index for December; Tuesday – December housing starts; Wednesday – December Consumer Confidence, November existing home sales; Thursday – weekly jobless claims, final reading for 3Q G.D.P. Friday – November personal income and spending, November new home sales, December U. of Michigan final Consumer Sentiment Survey.

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.