The Week On Wall Street: Bah Humbug
“If you don’t know who you are, the stock market is an expensive place to find out.” – Adam Smith, The Money Game
This will be an abbreviated update to stop by and wish everyone a HAPPY and HEALTHY HOLIDAY Season. 179 years ago this past Monday, Ebenezer Scrooge was introduced to the world with the publication of A Christmas Carol by Charles Dickens.
If there’s any consolation it’s that there are only four trading days left to go in 2022. I have mentioned that this is a headline-driven market and because of that writing market commentary over the last few months has been extremely difficult. It seems that most of the action hinges on premarket inflation reports or afternoon Fed announcements and the rest of the time is just spent bouncing around waiting for the next of these catalyst events.
Since the start of November, the market has reacted in a positive fashion to the CPI/PPI numbers and some less hawkish words from Jerome Powell. Then turned around on the last FOMC announcement that came with a more hawkish tone. In the meantime, it hasn’t done a whole lot. Accordingly, the S&P 500 came into this week right where it was on November 10th. Yet, the reactions to this “breaking news” have been violent enough that sometimes weeks of action are taking place in hours.
With the S&P 500 stalling out again around 4100, it once again has failed to take out resistance and remains a “show me” situation. We have to see this market prove to us that it has the underpinnings to go higher before we can get more aggressive on the “long side”.
The first sentence of this report referring to a headline-driven market is THE reason we can’t take any scenario to the bank. It is going to be a situation where we’ll have to follow what the market is telling us and stay with what is working.
The Action on Wall Street
Another sloppy trading session to open the week as the S&P closed down 0.90%. That was the 4th straight losing session bringing this decline to ~5%. As stocks opened for trading on Tuesday, this was the 2nd worst start (-5.73%) to December (13 trading days in) for the S&P since 1953 when the 5-day trading week began. Only 2018 was worse with a 10.6% drop at this point in the month.
The S&P 500 4-day losing streak ended with a paltry 3-point gain on the day, and the BULLS finally showed up on Wednesday to move the indices off recent lows as all of the major indices posted 1+% gains. Staying to their 2022 form, all of the indices gave back most of those gains on Thursday.
On Friday, the Santa Rally started off on a positive note with the S&P posting a modest 0.59% gain to close the week at 3844. Despite the rally, the DJIA was the only index to post a gain for the week. The NASDAQ composite continues to look the weakest. The recent upside move ended at resistance for all of the indices, keeping the downtrends in place.
The Daily chart of the S&P 500 (SPY)
Another week where little conviction was shown by either the BULLS or the BEARS. I guess many have wrapped up their year with the BEARS celebrating and the BULLS licking their wounds.
The quick waterfall decline after another rejection at resistance was halted with some back and forth trading as the week progressed. Investors shouldn’t lose sight of the fact that the stock market’s most important index still remains in a downtrend and that should be respected until it changes.
The key PCE chain price index, the FOMC’s favorite was released today and posted a small, as-expected 0.1% gain from 0.4%. The core rate rose 0.2% from 0.3%. The annual rates showed the headline slowing to a 5.5% year-over-year pace versus October’s 6.1% y/y pace. The core rate decelerated to 4.7% y/y from 5.0% y/y.
More bad news on the housing front.
The NAHB housing market index fell another 2 points to 31 in December after dropping 5 points to 33 in November. The index has been in decline all year, falling from 84 in December 2021. This is just shy of the 30 reading from April 2020 which was the weakest since June 2012. All of the weakness was in the single-family sales index which slid 3 points to 36 after tumbling 6 points to 39 previously.
The NAHB noted the headline drop was the smallest in six months and could be a harbinger that the bottom in homebuilder sentiment is near, especially as the mortgage rates have been coming down with the 30-year at 6.42% last week from the 7.16% cycle high from October 21 week.
U.S. existing home sales dropped 7.7% in November to a 2-year low pace of 4.09 million from a 4.43 million prior low undershot estimates and left the sales rate just above the 4.07 million troughs with the initial pandemic lockdowns in May of 2020. The drop marks a tenth consecutive decline, as soaring mortgage rates, fears of recession, price cutting after years of outsized gains, and an unwillingness of owners to relinquish properties have sharply depressed activity.
Existing home sales look poised for a 39% contraction rate in Q4, after rates of 38% in both Q2 and Q3, with weakness due to remarkably limited supply and surging mortgage rates.
Today’s new home sales report underperformed, as a downward revision to October numbers accounted for much of the unexpected increase. Analysts did see a 5.8% November bounce to a solid 640k pace. The median price fell just 2.8% from an all-time in October, while home inventories fell 1.7%, breaking a string of ten consecutive 13-year highs.
Recessionary warnings from Leading Indicators
The US leading economic index slumped another 1.0% in November to 113.5, more than expected, after plunging 0.9% to 114.7. in October and 0.5% to 115.8 in September. It is the largest drop since the April 2020 5.3% drop. It is a ninth straight monthly decline and it has fallen every month this year except for the 0.8% bounce in February.
That is the longest string of drops since the 22 consecutive months in the 2007-08 recession (and before that the nine consecutive months from July 1990 to March 1991). This is now the lowest index level since March 2021.
The components were mixed with six of the 10 declining with the biggest negative contributions coming from building permits (-0.37%), jobless claims (-0.31%), and consumer expectations (-0.23%). Offsetting the weakness were positive contributions from stock prices (0.21%) and nondefense capital goods orders excluding aircraft (0.02%).
Do NOT lose sight of the fact that this string of poor results is well in advance of the Fed’s interest rate hikes taking effect.
It’s my guess that the pundits suggesting the US is not in recession or about to enter one are dismissing this data point.
But better news on confidence
Consumer Sentiment from the Michigan survey revealed a headline bounce to an upwardly-revised 59.7 in December from a 4-month low of 56.8 in November. This week’s Michigan sentiment rise accompanied a December consumer confidence bounce to an 8-month high of 108.3 from 101.4, versus a 17-month low of 95.3 in July.
The IBD/TIPP index rose to 42.9 from 40.4, versus an 11-year low of 38.1 in August that was previously seen in June. Analysts have seen a confidence updraft since mid-year, though all of the measures have deteriorated sharply from mid-2021 peaks, and Michigan sentiment is fluctuating around remarkably weak levels. The surveys face headwinds from the mortgage rate surge through October, before the ensuing pull-back, and mounting recession fears.
And then there is disturbing news on the spending front.
A last-minute 4100-page 1.7 trillion dollar spending package has been fast-tracked by Congress before year-end. In addition to the spending spree, there are corporate tax hikes embedded in this legislation. Economics 101 tells us that spending causes inflation. The 4 trillion+ covid spending packages should be enough proof of why inflation is just now retreating from 40-year highs, but the spending goes on.
The policy errors continue and will make the Fed’s job more difficult in ’23. It keeps my outlook for growth very muted for next year. I’m not alone in that view, the Fed itself is looking for 0.5%-1% growth in ’23. Surveys from professional forecasters have GDP growth at 0.7% next year.
The sobering thought; they could be TOO HIGH.
This has been a tough year and I’m perfectly content to end the year with my current performance. I also don’t see anything at the moment that I consider to be a “slam dunk”.
Bottom Line; No one has missed out on much by playing more defensively lately by following the strategy that was highlighted here week after week.
I want to wish everyone a Happy and HEALTHY Holiday season. I’ll be back next week with another brief update to end the year.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client’s personal situation/requirements and discuss issues with them when needed. That is impossible for readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
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Best of Luck to Everyone!
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