Daily Market Notes: 12-27-2022

After a horrible day on Thursday, the market on Friday began the so-called “Santa Claus rally” period, which are the final five trading days of the old year and the first two of the new year, with a nice rally after a very weak opening.

The Dow turned an early decline of 213 points into a closing gain of 213 up to 33,203 led by CVX, HD, TRV and UNH. As a result, it was able to eke out a closing gain for the week.

The S&P also made a nice intraday recovery which turned an early 22 point loss into a final advance of 3844 but still ended the week lower for the third straight time. Going into the final week of the year, it is still lower by 19.3% for 2022. Ditto for the Nasdaq which eked out a closing gain of 21 up to 10,488 also for the third straight weekly loss while the Russell 2000 Index of small stocks gained 7 up to 1761.

The VIX made a nice decline as it should have on a lower day and ended at 20.87.

Markets are in a tricky situation where relatively solid consumer spending and a strong employment market reduce the risk of a recession but also raise the threat of higher interest rates from the Federal Reserve as it continues its campaign to eliminate inflation.

The government reported that the November PCE (Personal Consumption Index) slowed its gains for  the year to 0.1% for the month and 5.5% for the year which was the lowest since July and the core rate excluding food and energy were higher by 0.2% and 4.7% respectively. This is the one that the Federal Reserve monitors the most closely.

Also, growth in consumer spending weakened last month by more than expected at 0.1%, but incomes were a bit stronger than expected at a gain of 0.4%.

The market got a nice upward boost from the 10am release of the University of Michigan final December Consumer Sentiment  Index which rose to 59.7 and also indicated that households are lowering their forecasts for upcoming inflation. That could help avoid a scenario the Federal Reserve has said that it is desperate to prevent, namely a vicious cycle where shoppers rush to make purchases in advance of expected price rises, which would only worsen inflation.

Treasury yields rose following the reports with the 10-year Note up to 3.75% from 3.69% late Thursday. The yield on the two-year gained up to 4.31% from 4.28%. This narrowed the yield curve into 56 basis points from as high as 82 last week, which could be an encouraging sign.

The market is in somewhat of a tough spot as if consumers start slowing down, earnings are likely to decrease, but if the consumer remains strong, the Fed has to remain vigilant and interest rates would keep rising.

The Fed has been upfront about its plan to remain aggressive in raising interest rates in order to tame inflation, even though the pace of price increases continue to ease. The Fed has already hiked the federal funds rate to its highest level in 15 years, after it began the year at a record low of roughly zero. It now stands in a range of 4.25% to 4.5%, and Fed policymakers forecast that the rate will reach a range of 5% to 5.25% by the end of 2023.

Their current forecast does not call for a rate cut before 2024. The high rates have raised concerns that the economy could slow too much and slip into a recession in 2023. High rates have also been weighing heavily on prices for stocks and other investments.

Inflation remains a global problem. Japan reported its core inflation rate, excluding volatile fresh foods, rose to 3.7% in November, the highest level since 1981, as surging costs for oil and other commodities added to upward price pressures in the world’s third-largest economy.

As of now, 2022 has been the worst year for stocks since the global financial crisis of 2008 after three straight positive years and a rise of 27% for the S&P last year. This poor performance was illustrated by the record withdrawal of $42 billion from equity fund a couple of weeks ago.

Regarding the Santa Claus rally, which historically average an S&P gain of 1.3% as opposed to the historical 0.2% market advance during any seven-day period. It also gains 73% of the time during this period and has a 67% probability to gain the following year if it is higher during this time frame as well.

This week is light on earnings with : Wednesday – CALM.

Economic reports will have: Tuesday – October CaseShiller Home Price Index rose by 9.2%, Dallas Fed December manufacturing index; Wednesday – November pending home sales, Richmond Fed December Manufacturing Index; Thursday – weekly jobless claims; Friday – December Chicago Business Barometer.

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.