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Weekly Review
The week started strong after last week’s losses then quickly stagnated a fell as we awaited and then reacted the CPI release and FOMC policy decision in the mid-week.
Some merger and acquisition activity helped to fuel the early positivity in the week. We saw Amgen ($AMGN) acquire Horizon Pharmaceuticals ($HZNP) for $116.50 per share and Thoma Bravo acquire Coupa Software ($COUP) for $81.00 per share.
Then, the Consumer Price Index (CPI) release for November came in lower than anticipated which encouraged market upside based on the idea that a moderation in inflation should convince the Fed to slow the pace of its rate hikes. Or even place a lower ceiling on its terminal rate.
This pushed the S&P above its 200-day moving average. The Dow was up 2.1% at intraday highs on Tuesday and Nasdaq 3.8%. Those gains were eventually reined in and closed well off of the highs.
A deeper look at the CPI reading shows sticky and elevated core services in front of the FOMC rate decision to follow the next day. The major indices regroup in premarket trading on Wednesday and made some gains leading up to the FOMC announcement.
The Fed announced a 50 basis point raise to 4.25-4.50% and indicated in their Summary of Economic Projections that their median estimates for the terminal rate in 2023 and their expectations for inflation had risen. The vote to raise the fed funds rate was unanimous. The below dot plot shows 17 of the 19 Fed officials forecast a rate above 5% in 2023.
Separately, there was another announcement that the Fed would continue to let $60 billion of Treasury securities and $35 billion of agency mortgage-backed securities fall off the balance sheet each month.
Fed Chair Powell spent most of his press conference being stern on committing to 2% inflation, saying that it is going to take substantially more evidence to give confidence that inflation is on a downward path and the Fed expects to sit at its terminal rate for some time. He confirmed that we are close to level of tightening needed, but the Fed’s focus is not on rate cuts, which we can see is the case in the Economic Projections.
Overall, the Fed was much more hawkish than what the market expected. The indices faded into close on Wednesday and saw continued selling over the remainder of the week pushed by larger concern that the Fed could overtighten and trigger a deeper economic slowdown.
Thursday saw a slurry of rate hikes from other central banks across the world. The ECB, Bank of England, Swiss National Bank, Hong Kong’s Monetary Authority, and the Norges Bank all raised their benchmark rates. These hikes occurred at the same time that we received updated retail data and industrial production data out of the US and China. Both items grew concerns of global economic slowdown.
The S&P, Dow, and Nasdaq fell 99, 764, and 360 points respectively during Thursday’s freefall. Events this week showed that projections for 2023 earnings are at greater risk of downward revisions and stock prices are adjusting. The same mentality occurred on Friday with a quadruple witching day. There was broad based selling in the market and a number of moving average supports were broken.
Overall, the S&P fell 5% from where it was prior to the FOMC decision on Wednesday to where it closed on Friday. 10 of the 11 sectors in the S&P were red this week with consumer discretionary, materials, and communication services faring the worst, meanwhile the energy sector was the lone green close.
Dividend Dollars’ Opinion
That’s it for the recap. Now for my opinion!
Last week I was almost spot on with my expectations and main takeaways. I said that the CPI release and the FOMC meeting could provide huge volatility in the market, and it did. In both ways too. The market was up over 1.4% on Monday leading up to the report and another 7% on Tuesday after the report. Then the FOMC projections and meeting minutes were released, and the hawkish Fed scared the market into breaking down below a number of key moving averages.
Last week, I spoke about the straddle between the 100 and 200 SMAs and a break above could end at the trendline. Monday and Tuesday did just this when riding on the coattails of the positive CPI report. Then I spoke about how a breakdown under the 100SMA and we could see a quick drop to the 3,815 area as a gap fill.
Much to my surprise, BOTH of those situations played out. The Fed meeting showed that a majority of members raised their expectation of the terminal rate and the raised their average expected inflation rates for the next two years. This shook the markets, causing a drop from $4,020 to $3,830 in three days. Pretty dang close to the area I called.
Moving forward, there is much more technical resistance to push us down, rather than support to push us higher. Now that we’ve broken through the 200SMA, 100SMA, and are close to breaking the 50SMA, these figures are becoming resistance.
We are on the verge of breaking through the bear market line (20% draw down from recent highs) with the YTD low looking not too far behind it. We are approximately +12% away from the bull market line (20% gain over recent lows) and -7% from YTD low.
Signs are pointing lower. Key data releases next week of the Q3 GDP, jobless claims, PCE, and consumer sentiment will give us continued hints into the state of the economy and the lagging effects of rate hikes. The Fed is expecting lower GDP in the next year, maybe we see this begin with the Q3 GDP reading. This will be economic data release to watch next week in my opinion. Surprises in either direction could carry big moves in market prices.
With the next earnings season on the way, Fed commentary continuing to spark volatility, and mixed economic data, the next move is anybody’s guess. I think a near-term bounce is likely with more downside to follow after the new year. Then, January will be the month to watch as history shows that it sets the market’s mood for the rest of the year.
I would love to see more red next week so that I can buy more discounted stocks like I did this week. You can read about my buys 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.
Regards,
Dividend Dollars