It Was A Trend-Down Week For The Stock Market Following A Big Run In A Short Amount Of Time.
Entering the week, the Dow Jones Industrial Average was up 19.9% this quarter, the S&P Midcap 400 was up 16.8%, the Russell 2000 was up 13.7%, the S&P 500 was up 13.6%, and the Nasdaq Composite was up 8.4%.
Those gains were partially predicated on the notion that the Fed may be apt to soften its approach, a view that was presumably aided by Fed Chair Powell's speech last week.
Buyer enthusiasm was reined in this week, however, as festering concerns that the Fed might overtighten and trigger a period of much weaker growth, if not an actual recession, rose to the forefront. The main sticking point for stock market participants is that a weaker growth outlook does not bode well for 2023 earnings growth prospects.
A stronger-than-expected ISM Non-Manufacturing Index for November (56.5% vs 54.4% prior) also bolstered the view that the Fed is apt to keep rates higher for longer.
So, it was a disappointing start to a historically strong month for the stock market. The S&P 500 had the worst start to a month (five consecutive losses) since 2011, according to Bloomberg.
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 five basis points to 4.34% and the 10-yr note yield rose six basis points to 3.57%.
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 (-0.3%), health care (-1.3%), and consumer staples (-1.8%) sectors. The sharpest losses were logged by the energy (-8.4%), communication services (-5.4%), and consumer discretionary (-4.5%) sectors.
Collapsing oil prices were another manifestation of the market's growth concerns. WTI crude oil futures fell 10.5% this week to $71.58/bbl despite reports that China is easing up on zero-COVID related policies.
The market's slowdown worries were further corroborated by some cautious-sounding remarks about consumers and/or the economic outlook from the CEOs of JPMorgan Chase, Walmart, and Union Pacific in CNBC interviews this week.
Market participants did receive 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, cognizant that the driver of weaker inflation will be weaker growth that will lead to further cuts to earnings estimates.
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 a preferred source to float the Fed's thinking. 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 acquisition of Activision Blizzard.
Looking ahead to next week, market participants will be focused on the November Consumer Price Index (CPI) on Tuesday after the Producer Price Index (PPI) for November came in hotter-than-expected this Friday. On the heels of the CPI report, participants will be eyeing the FOMC decision and release of updated economic projections on Wednesday.
Dow Jones Industrial Average: -2.8% for the week / -7.9% YTD
S&P Midcap 400: -4.1% for the week / -13.1% YTD
Russell 2000: -5.1% for the week / -20.0% YTD
S&P 500: -3.4% for the week / -17.5% YTD
Nasdaq Composite: -4.0% for the week / -29.7% YTD