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It was a trend-down week for the stock market after the quick run we experienced in the end of last week. At the start of the week, the S&P 500 was up over 10% for the quarter, the Dow Jones Industrial average was up over 18%, the NASDAQ composite was up over 6%, and the Russel 2000 was up over 11%
These gains have primarily been predicated on the notion that the Fed may soften its approach, a view that was presumably aided by Fed Chair Powell’s speech last week at the Brookings Institute.
This optimism was cooled this week as concerns resurfaced that the Fed might overtighten and trigger a period of much weaker growth or even recession. The main sticking point for the stock market is that a weaker growth outlook does not bode well for 2023 earnings.
A stronger-than-expected ISM Non-Manufacturing Index for November (56.5% vs 54.4% prior and a 53.3% expectation) also supported the idea that the Fed may rise rates higher and hold them there for longer.
Going into the historically strong “Santa Rally” month, this week was a disappointing start. The S&P 500 had the worst start to a month (five consecutive losses) since 2011.
Concerns that the Fed is going to trigger a deeper economic setback have been evident in the Treasury market for some time now. An inversion of the yield curve, which deepened this week, has often been a leading indicator of a recession. The 2s10s spread is now the widest it has been since the early 1980s. The 2-yr note yield rose to 4.37% and the 10-yr note yield rose to 3.63%.
Those growth concerns started to register more noticeably for the stock market this week. All 11 S&P 500 sectors lost ground, but the slimmest losses were registered by the counter-cyclical utilities, health care, and consumer staples sectors. The sharpest losses were logged by the energy, communication services, and consumer discretionary sectors.
Collapsing oil prices were another manifestation of the market’s growth concerns. WTI crude oil futures fell 10.8% this week to $71.29/bbl despite reports that China is easing up on zero-COVID related policies.
There was some economic data that reflected a welcome moderation in wage-based inflation. The revised Q3 Productivity Report showed a softer 2.4% increase in unit labor costs than the preliminary estimate of 3.5%. Stocks did not rally on the data, though.
The role of wage based inflation in the Fed’s policy decisions was highlighted this week by an article in The Wall Street Journal from Nick Timiraos, who some believe is the Fed’s preferred journalist for providing breaking information. Mr. Timiraos suggested that wage inflation could ultimately compel the Fed in 2023 to take its benchmark rate higher than the 5.00% the market currently expects.
In other news this week, the FTC is seeking to block Microsoft’s ($MSFT) acquisition of Activision Blizzard ($ATVI).
Looking ahead to next week, the market will be focused on the November Consumer Price Index (CPI) on Tuesday after the Producer Price Index (PPI) for November came in high this Friday. Then the FOMC decision and release of updated economic projections follows on Wednesday and could very well provide a volatile market for the week.
Dividend Dollars’ Opinion
That’s it for the recap. Now for my opinion!
Last week we had a clean rejection off of the major trendline on Monday, fell to the 100-day simple moving average on Tuesday, bounced a bit on Thursday, and fell back down to the 100 SMA on Friday.
This 100-day SMA has been triple-confirmed as support (small white arrows below) and will now be tested again this next week. Resistance at the 200-day SMA proved to work again this week. SPX ran into resistance at the 200-day SMA in August and couldn’t hold over it Monday morning.
Right now, the market is in a little bit of straddle under the 200SMA and the 100SMA. Break over the 200SMA and bulls could have a hayday until the meet the trendline again for the next task. Break under the 100SMA and bears could see a quick drop to 3,815 area as a gap fill.
Last week did not show much strength for buyers, so I think breaking down or hugging onto the 100SMA is a more likely path.
Economic events next week could bring huge momentum into the market in either direction depending on how they play out.
On Monday we have the treasury budget which shouldn’t be too significant. If anything, Monday price action will be fairly uneventful as the market awaits the CPI reading on Tuesday. If the CPI comes in higher than expected, the market could drop fast. If CPI comes in better than expected, investors will still wait for the FOMC rate decision on Wednesday to truly bring in heavy buying power.
Wednesday will be the key to next week. As we get closer to the Fed Funds target rate with each rate hike, the subsequent rate hikes become more and more important as clues to tell us if the Fed over or undershot. The market expects a 50-bps hike on Wednesday, if we see higher or low expect volatility.
Then, Thursday will bring us retail data which will give input on the state of the consumer. All of these big items together will make next week one to remember (and be cautious of).
Add to that, next week is also the last week of earnings season with a couple of big tech names ($ADBE and $ORCL) reporting. Q3 earnings, from the 497 S&P 500 companies that have reported so far, have a 59% beat of the top line and 69% beat of the bottom line. This was 63% and 76% last quarter, respectively.
Big misses by the earnings next week could enhance any downward moves that are predicated by the economic events. Any surprises won’t carry much weight into what appears to be a very bearish week next week.
What’s more important is drop in earnings beats from last quarter. This is a clear sign that the Fed driven growth slow down is occurring. Expect more lack luster earnings seasons, and to greater degrees, while we stay in this high-rate environment.
Overall, next week’s performance lies greatly with the CPI and Fed rate change. Those things are tough to predict, therefore, outside of those events and looking only at technicals, I think next week is a red one. But only time will tell! Be ready either way!
I was ready for the move down last week and made some favorable adds to my portfolio. You can read about these moves in my weekly portfolio update here.
And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.