Market Recap - Ending the year with more losses

Specifically, mega cap losses accelerated this week on lingering valuation concerns and presumably tax-loss selling activity by participants who bought into the seemingly invincible stocks last year. 

Some of the mega cap names aren't so "mega" any more given the massive loss in market capitalization they have suffered this year. The Vanguard Mega Cap Growth ETF fell 0.3% this week and 34.0% this year. 

The Santa Claus rally period, which encompasses the last five trading days of the year and the first two trading sessions of the new year, has gotten off to an uneven start. It is believed to be a good sign for how the new year will start when this period produces a cumulative gain over that stretch. 2022 was a definite exception to that belief. Recall that the 2021 Santa Claus rally produced a net gain of 1.4% for the S&P 500 and yet the S&P 500 declined 5.3% this January and 5.0% in the first quarter. 

It looked like Santa Claus might come charging to town following Thursday's rally. The S&P 500 closed the session just a whisker below the 3,850 level, where it has remained since mid-December, but then backed off again in Friday's trade. 

When this year's Santa Claus rally period began, the S&P 500 stood at 3,822.39. The S&P 500 closed Friday's session at 3839.50 after visiting the 3,800 level.

It was also a disappointing week in the Treasury market. The 2-yr note yield rose 10 basis points to 4.42% and the 10-yr note yield rose 13 basis points to 3.88%. 

The bump in yields was another headwind for equities, particularly the growth stocks, which was the case all year. The Russell 3000 Growth Index fell 0.3% this week, and 29.6% for the year, versus the Russell 3000 Value Index which rose 0.1% this week and fell 10.1% for the year.

Separately, Southwest Air was an individual story stock of note after the airline canceled thousands of flights due to the winter storm. Tesla was another focal point, trading in roller-coaster fashion. The stock hit 108.76 at its low on Tuesday, leaving it down 69.0% for the year, but managed to rebound and hit a high of 124.48 in Friday's trade.

Only two of the 11 S&P 500 sectors closed with a gain this week in thin trading conditions. The financials sector rose 0.7% and the energy sector rose 0.6%, aided by a bump in oil prices above $80.00/bbl. Meanwhile, the materials and consumer staples sectors were the worst performers with losses of 1.2% and 0.9%, respectively. 

The economic calendar was light on major releases this week. Featured reports included the November Pending Home Sale Index, which declined 4.0%, and continuing jobless claims for the week ending December 17, which hit their highest level since February (1.710 million). Next week will see a cascade of major releases that includes the December ISM Manufacturing Index, the December Employment Situation Report, and the December ISM Non-Manufacturing Index.

·    Dow Jones Industrial Average: -0.2% for the week / -8.7% YTD

·    S&P Midcap 400: -0.2% for the week / -14.5% YTD

·    S&P 500: -0.1% for the week / -19.4% YTD

·    Russell 2000: flat for the week / -21.6% YTD

·    Nasdaq Composite: -0.3% for the week / -33.1% YTD

Market Recap - MIXED WEEK AHEAD OF HOLIDAY-LENGTHENED WEEKEND

It Was An Overall Disappointing Week For A Market That Is Still Looking For A Santa Claus Rally To End The Year.

Tax-loss selling efforts were likely part of this week's losses, but sentiment overall soured because of a growing belief that 2023 earnings estimates are too high and will be subject to downward revisions in coming weeks and months as the economic environment deteriorates. The S&P 500, which touched 4,100 last Tuesday, was drawn to the 3,800 level all week, which proved to be a key support area. 

Things got started on a weaker note as market participants digested a weaker-than-expected NAHB Housing Market Index report for December on Monday. Participants were also reacting to a Bloomberg report highlighting a rebalancing disposition that will presumably favor bonds in the last few weeks of the year.

To be fair, price action in the bond market this week did not corroborate that article. The 10-yr note yield rose 27 basis points to 3.75% and the 2-yr note yield rose 11 basis points to 4.31%. 

Most of the action in the Treasury market was precipitated by a surprise move from the Bank of Japan (BOJ) on Tuesday. The BOJ announced a surprise tweak to its yield curve control (YCC) policy to allow the 10-yr JGB yield to move +/- 50 basis points from 0.00% versus its prior band of +/- 25 basis points as part of an effort "to improve market functioning." 

This announcement, which came in conjunction with the BOJ's decision to leave its benchmark rate unchanged at -0.1%, also caused some upheaval for the Nikkei (-2.5%) on Tuesday and the currency market in addition to sovereign bond markets. The yen surged as much as 4.0% against the dollar. 

Market participants also had to deal with some disappointing housing data before Tuesday's open, namely an 11.2% month-over-month decline in November building permits (a leading indicator) to a seasonally adjusted annual rate of 1.342 million (Briefing.com consensus 1.480 million). Single-unit permits were flat to down in every region.

The S&P 500 dropped below 3,800, scraping 3,795 at Tuesday's low before buyers showed up for a small rebound effort that ultimately left the main indices with modest gains. 

The impetus for the reversal was the weakness itself. The major indices were in a short-term oversold position. At their lows Tuesday morning, the Nasdaq Composite and S&P 500 were down 9.7% and 7.5%, respectively, from their highs last week. That oversold posture triggered some speculative buying interest rooted in a belief that the market was due for a bounce.

Things really took off Wednesday when some well-received earnings reports from Dow component Nike and leading transport company FedEx triggered some decent buying interest. 

Market participants also digested some better-than-expected consumer confidence data for December, which was another support factor for the broader market. That report overshadowed a weaker than expected existing home sales report for November that was released at the same time.

Unfortunately, the rebound move soured promptly on Thursday following some disappointing earnings results and commentary from Micron and CarMax, a dour Leading Economic Indicators report, and some cautious-sounding remarks from influential hedge fund manager David Tepper on the market's prospects. 

Mr. Tepper said he is leaning short the equity markets as he expects the Fed and other central banks to keep tightening and for rates to remain high for a while, making it "difficult for things to go up." His comments resonated with market participants who recalled the hugely successful "Tepper Bottom" call he made in March 2009.

The resulting retreat was broad in nature with the major indices moving noticeably lower right out of the gate, dealing as well with rate hike concerns after the third estimate for Q3 GDP showed an upward revision to 3.2% from 2.9%. The Nasdaq, S&P 500, and Dow were down 3.7%, 2.9%, and 2.4%, respectively, at Thursday's lows.

The S&P 500 was stuck below the 3,800 level and Tuesday's low (3,795) for most of the session before the main indices managed to pare some of their losses in the afternoon trade. There was no specific news catalyst to account for the bounce, which appeared to be driven by some speculative bargain hunting interest following the early washout. 

Friday's session also started on a downbeat note after the November Personal Income and Spending Report showed no growth in real spending and PCE and core-PCE inflation rates that are still too high on a year-over-year basis (5.5% and 4.7%, respectively) for the Fed's liking.

This report meshed with a Durable Goods Orders Report for November that was weaker than expected and was subsequently followed by economic data at 10:00 a.m. ET that showed new home sales were stronger than expected in November and that easing inflation pressures helped boost consumer sentiment in December. 

Once again, the S&P 500 slipped below the 3,800 level, but soon found support as the new home sales and consumer sentiment data bolstered investor sentiment and spurred some bargain hunting interest. The major indices finished modestly higher on Friday, taking a positive first step during the Santa Claus rally period (last five trading days of the year plus the first two trading sessions of the new year). 

Separately, the week concluded with the House passing the $1.7 trillion government funding bill after the Senate passed it, leaving it to be signed by the president early next week.

Sector performance this week overall was mixed. Six sectors finished higher and five sectors finished lower. The best performing sectors were energy (+4.4%), utilities (+1.4%), financials (+1.4%), and consumer staples (+1.0%). The weakest links this week were the consumer discretionary (-3.1%) and information technology (-2.0%) sectors, which were dragged down by their mega cap components. The Vanguard Mega Cap Growth ETF (MGK) declined 2.1% for the week. 

• Dow Jones Industrial Average: +0.9% for the week / -8.6% YTD

• S&P Midcap 400: +0.8% for the week / -14.3% YTD

• S&P 500: -0.2% for the week / -19.3% YTD

• Russell 2000: -0.1% for the week / -21.6% YTD

• Nasdaq Composite: -1.9% for the week / -32.9% YTD

Market Recap - Recession fears keep pressure on stock prices

The Week Started On A More Upbeat Note Following Last Week's Losses. The Market Logged Some Gains In The First Half Of The Week As Participants Awaited Key Economic Data And The FOMC Policy Decision On Wednesday.

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%.

Some M&A activity on Monday, highlighted by Amgen acquiring Horizon Pharmaceuticals for $116.50 per share and Thoma Bravo acquiring Coupa Software for $81.00 per share, helped fuel the early positive bias.

In addition, the November Consumer Price Index (CPI) came in cooler-than-expected on Tuesday, which added fuel to the buying efforts on the notion that a welcome moderation in headline inflation should convince the Fed to temper the pace of its rate hikes and perhaps place a lower ceiling on its terminal rate. The knee-jerk buying brought the S&P 500 above its 200-day moving average.

At their intraday highs on Tuesday the Dow Jones Industrial Average was up 707 points or 2.1%, the Nasdaq Composite was up 428 points or 3.8%, and the S&P 500 was up 110 points or 2.8%. Those gains, however, were eventually reined in to a large degree, and while the major indices registered gains for the session, they closed well off those highs in a disappointing finish. Ultimately, the S&P 500 fell back below its 200-day moving average by Tuesday's close.

A deeper look at the CPI readings revealed a sticky, and elevated, core services number that forced investors to rein in their enthusiasm in front of the FOMC policy decision, the release of an updated Summary of Economic Projections, and Fed Chair Powell's press conference on Wednesday.

The major indices regrouped in early action on Wednesday and logged some decent gains in front of the FOMC announcement. Things changed abruptly, however, in the wake of the decision to raise the target range for the fed funds rate by 50 basis points to 4.25-4.50% and the indication in the Summary of Economic Projections that the median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%.

The vote to raise the fed funds rate was unanimous. Separately, it was announced that the Fed will continue to let $60 billion of Treasury securities and $35 billion of agency mortgage-backed securities roll off its balance sheet each month.

The so-called "dot plot" showed 17 of 19 Fed officials with a fed funds rate forecast above 5.00% in 2023 and two of the 17 had their dots above 5.50%.

On balance, this was a hawkish-minded package that did not meet the market's more hopeful expectations for a more conciliatory Fed.

Fed Chair Powell spent almost all of his press conference talking tough on the need to get inflation back down to 2.0%, saying it is going to take substantially more evidence to give confidence that inflation is on a sustained downward path and that the Fed expects to sit at its terminal rate for some time. He eventually added that, while he thinks the Fed's policies are getting close to the level of sufficiently restrictive, the Fed's focus is not on rate cuts; hence, there are not rate cuts in the Summary of Economic Projections for 2023.

Strikingly, the stock market made a noticeable rebound while the Fed chair was speaking, as did the Treasury market. The U.S. Dollar Index, meanwhile, faded back to a level that was lower than where it was before the announcement.

The action in the stock, bond, and currency markets suggested that market participants didn't think the Fed will have the runway to take off to a terminal rate that is north of 5.00%. The reason being is that there is an underlying expectation/fear that the lag effect of prior rate hikes is going to undercut the economy enough to pre-empt a move to the elevated levels envisioned in the latest Summary of Economic Projections.

Still, the indices faded into the close that day and saw continued selling over the remainder of the week, undercut by a larger concern that the Fed will overtighten and trigger a deeper economic setback.

Price action in the Treasury market this week was another manifestation of those Fed overtightening and recession related fears. The 2-yr note yield fell 14 basis points to 4.20% and the 10-yr note yield fell nine basis points to 3.48%.

Thursday's session was dominated by a slate of rate hikes from other central banks. Namely, the European Central Bank, the Bank of England, the Swiss national bank, and the Norges Bank. Hong Kong's Monetary Authority also raised its benchmark rate. Those moves coincided with the release of disappointing retail sales and industrial production data out of both China and the U.S., which exacerbated investors' concerns about a global economic slowdown.

The Dow, Nasdaq, and S&P 500 declined 764 points, 360 points, and 99 points, respectively, during Thursday's retreat. The direct connection for stock prices is that 2023 earnings estimates are at increased risk for downward revisions; hence, there were misgivings about current valuations. The same mentality prevailed on Friday's quadruple witching options expiration day. Broad based selling interest saw the S&P 500 breach support at its 50-day moving average.

In brief, the S&P 500 declined 5.0% from where it was just ahead of the FOMC decision on Wednesday to its closing level on Friday.

Ten of the 11 S&P 500 sectors lost ground this week. The heavily weighted information technology (-2.7%) and consumer discretionary (-3.6%) sectors were among the more notable laggards. Meanwhile, the energy sector (+1.7%) was alone in the green by Friday's close.

• Dow Jones Industrial Average: -1.7% for the week / -9.4% YTD

• S&P Midcap 400: -2.2% for the week / -15.0% YTD

• Russell 2000: -1.9% for the week / -21.5% YTD

• S&P 500: -2.1% for the week / -19.2% YTD

• Nasdaq Composite: -2.7% for the week / -31.6% YTD

Market Recap - GROWTH CONCERNS RISE TO THE FOREFRONT

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

Market Recap - Resilient Market Holds onto Wednesday's Gains

There Wasn't Much Action In The First Half Of The Week Coming Off The Holiday-Fueled Gains Last Week. Participants Played A Waiting Game In Front Of Fed Chair Powell's Speech On Wednesday And A Slate Of Key Economic Data Later In The Week.

The market liked what it heard in Mr. Powell's speech and things took off in a big way on Wednesday. Fed Chair Powell reportedly did not tighten the screws of his monetary policy position any further.

Some will contend that he actually loosened the screws a bit. We would argue that he showed up with his toolbox at the Brookings Institution but never took a tool out of the box. The market, waiting with bated breath for the Fed Chair to lower the hammer, let out a huge sigh of relief when he did not.

The market's worst fear then was not realized and that became a rally catalyst that ultimately triggered a huge short-covering rally and some chasing action as the S&P 500 broke above key resistance at its 200-day moving average.

It was an overreaction in our estimation because the Fed Chair repeated just about everything he said following the November FOMC meeting, but in splitting linguistic hairs, some added attention was paid to his summation that "the ultimate level of interest rates will be somewhat higher than previously expected" versus the original contention that "the ultimate level of interest rates will be higher than previously expected."

Mr. Powell's remarks (and tone) presumably lessened the fear of another 75-basis point rate hike. Granted the fed funds rate is still going higher from current levels, but market participants can smell a peak in the policy rate around 5.00% in the first half of next year. If the FOMC elects to raise the target range by 50 basis points at the December meeting, the target range will be 4.25-4.50%.

On Thursday, market participants received the October Personal Income and Spending Report, which favored the "smaller" rate hike at the same time it favored a soft landing possibility.

Briefly, personal income increased 0.7% month-over-month in October (Briefing.com consensus 0.4%) and personal spending jumped 0.8% (Briefing.com consensus 0.8%). The PCE Price Index was up 0.3% month-over-month (Briefing.com consensus 0.4%) and the core-PCE Price Index, which excludes food and energy, increased 0.2% (Briefing.com consensus 0.2%).

On a year-over-year basis, the PCE Price Index was up 6.0%, versus 6.3% in September, and the core-PCE Price Index was up 5.0%, versus 5.2% in September.

The key takeaway from the report was the improvement in the inflation readings, particularly the core-PCE Price Index given Fed Chair Powell's emphasis that the Fed's policy tools are better designed for working on core inflation.

The big rally effort ran into some resistance as market participants contended with the notion that the upside moves might have been an overreaction and that the growth environment is going to be challenging given the past rate hikes and the rate hikes that are yet to come.

A 49.0% reading for the November ISM Manufacturing Index, which is the first sub-50% reading (the dividing line between expansion and contraction) since May 2020, reined in some of the rebound enthusiasm.

The strength of the mid-week rally was tested again when market participants received the November employment report on Friday. Nonfarm payroll growth was higher than expected, the unemployment rate held near a 50-year low of 3.7%, and average hourly earnings increased at a robust 0.6% month-over-month, leaving them up 5.1% year-over-year.

The report itself was good news from an economic standpoint, yet the market saw it as bad news, thinking it will push out any eventual pivot by the Fed with its monetary policy. In brief, the report signals higher for longer with respect to the target range for the fed funds rate.

The initial retreat following the employment report saw the S&P 500 breach its 200-day moving average, but by Friday's close the index reclaimed a position above that level. All in all, this week was a win for the bulls given that the market showed nice resilience to selling efforts and the S&P 500 held the line at that key technical level.

Nine of the 11 S&P 500 sectors closed with a gain on the week. Communication services (+3.3%) and consumer discretionary (+2.1%) enjoyed the biggest gains. Meanwhile, financials (-0.6%) and energy (-2.0%) were the lone sectors in the red by the end of the week.

In the Treasury market, there were big down swings predicated on the thinking that maybe the Fed won't have to raise rates as high as feared. The continued inversion along the yield curve reflects the festering concerns about the Fed raising rates into a weakening economy and inviting a recession. The 2-yr note yield fell 19 basis points to 4.29% and the 10-yr note yield fell 18 basis points to 3.51%.

• Dow Jones Industrial Average: +0.2% for the week / -5.3% YTD

• S&P Midcap 400: +0.6% for the week / -9.4% YTD

• Russell 2000: +1.3% for the week / -15.7% YTD

• S&P 500: +1.1% for the week / -14.6% YTD

• Nasdaq Composite: +2.1% for the week / -26.7% YTD

Market Recap - Winning Holiday-shortened Week

It Was Another Winning Week For The Stock Market Amid Thinner Holiday Trading Conditions. The Gains Were Consistent With A Seasonal Bias Considering The Market Normally Trades With A Positive Disposition During Thanksgiving Week.

The seasonality helped to offset the market's ongoing growth concerns, which were put on the backburner this week despite more news about China's COVID‐related measures.

China confirmed its first COVID‐related deaths in six months and new lockdown measures have reportedly brought Beijing to a near standstill.

Aside from the seasonality factor, the upside bias was fueled by better-than-expected earnings reports from retail issues like Best Buy (BBY) and Abercrombie & Fitch (ANF), along with some names from the tech space like Analog Devices (ADI) and Dell Technologies (DELL). Also, farm equipment company Deere (DE) was among the more notable earnings‐driven winners.

Another individual winner this week was Disney (DIS), which traded up on the news that Bob Chapek stepped down as CEO and that former CEO Bob Iger is coming back to run things for a two‐year stint.

Movement in the Treasury market was generally supportive of the stock market this week. The 10‐yr note yield fell 13 basis points to 3.69% and the 2‐yr note yield fell 2 basis points to 4.48%.

Market participants also had a slew of economic data to digest this week. Some reports, like October Durable Goods Orders, October New Home Sales, and the November University of Michigan Index of Consumer Sentiment, were better than expected, but others, like the Weekly Initial Claims and Preliminary November IHS Markit Manufacturing and Services PMIs, were worse than expected.

The FOMC Minutes for the November 1‐2 meeting revealed that, "a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate." This corroborated the market's notion that the Fed is likely raise rates by 50 bps in December versus a 75 bps rate hike.

All 11 S&P 500 sectors closed with a gain this week. The materials (+3.0%) and utilities (+2.9%) sectors sat atop the leaderboard while energy (+0.2%) showed the slimmest gain as market participants continue to deal with growth concerns.

• Dow Jones Industrial Average: +1.7% for the week / ‐4.1% YTD

• S&P Midcap 400: +2.6% for the week / ‐10.8% YTD

• Russell 2000: +0.7% for the week / ‐19.8% YTD

• S&P 500: +1.5% for the week / ‐14.4% YTD

• Nasdaq Composite: +0.1% for the week / ‐29.2% YTD

Market Recap - GROWTH CONCERNS LEAD TO MODEST PULLBACK

The Stock Market Pulled Back This Week After A Big Run Recently. Trading Reflected Some Consolidation Efforts And Growth Concerns In A Slowing Economic Environment.

The Fed has been in the middle of those growth concerns as Fed officials have reiterated that they are not done yet raising rates. Comments from St. Louis Fed President Bullard (2022 FOMC voter) were the most impactful for market participants this week. He acknowledged that the fed funds rate is not yet at a sufficiently restrictive level and then showed in a Taylor Rule exercise that it may need to go to 5-7% in the battle to get inflation under control.

Other remarks from Fed officials included:

• Fed Governor Christopher Waller (FOMC voter), who said "we've still got a ways to go" before stopping interest rate hikes. Later in the week he said, that he's more comfortable stepping down to a 50-basis point hike at the December FOMC meeting following the economic data releases from the last few weeks.

• Fed Vice Chair Brainard said it may 'soon' be appropriate to slow the pace of rate hikes.

• Kansas City Fed President George (2022 FOMC voter) for her part said a real slowing in labor markets and a contraction in the economy may be needed to reduce inflation, according to CNBC.

• Boston Fed President Collins (2022 FOMC voter) said in a CNBC interview that a 75 basis point rate hike is still on the table.

• San Francisco Fed President Daly (2024 FOMC voter) said that the idea of the Fed pausing its rate hikes is not even on the table for discussion right now and that she thinks a 5.00% fed funds rate is a reasonable level where the Fed can hold rates.

The continued inversion along yield curve this week reflected worries about the Fed over tightening. The 2-yr Treasury note yield rose 19 basis points this week to 4.50% while the 10-yr note yield fell one basis points to 3.82%.

Meanwhile, market participants received some data this week that played into investors' concerns about a deteriorating economic outlook. The October Producer Price Index revealed some welcome disinflation at the producer level with total PPI up 8.0% yr/yr, versus 8.4% in September, and core PPI, which excludes food and energy, up 6.7% yr/yr, versus 7.1% in September.

There was also the Retail Sales Report for October, which reflected a 1.3% increase following a flat reading in September. Despite the stronger-than-expected retail sales data, there is a concern that discretionary spending activity is apt to slow in coming months as more consumers feel the pinch of rising interest rates, stubbornly high inflation, a reduced wealth effect, and increased layoff announcements and concerns about job security.

Retailers Target and Walmart acknowledged that consumers were pulling back on discretionary purchases after reporting earnings this week. Walmart reported good results for its fiscal third quarter, but CEO John David Rainey noted that consumers were "making frequent trade-offs and biasing spending toward everyday essentials."

In general, there was a positive response to earnings reports from retailers this week. Lowe's, Macy's, Bath & Body Works, Ross Stores, Foot Locker, Gap, and Dow component Home Depot all traded up after reporting their respective quarterly results. 

For the tech sector, Cisco, Applied Materials, and Palo Alto Networks also enjoyed some gains after their earnings reports. 

There were some not-so-great quarterly results, too, that were met with selling efforts. William-Sonoma and Advance Auto both suffered losses after disappointing with their earnings reports. 

Micron was another standout individual after cutting its DRAM and NAND wafer starts by ~20%, saying that the market outlook for calendar 2023 has recently weakened. Micron also said it is working toward additional capex cuts.

An added point of concern that market participants dealt with this week is that earnings estimates for 2023 are too high and will be subject to downward revisions. Investors took some money off the table this week and are mindful about how much they are willing to pay for every dollar of earnings. 

To be fair, some contrarian buying interest was stoked by BofA Global Fund Manager Survey early in the week that showed an elevated cash position of 6.2%.

There was a knee-jerk response to a halting report earlier this week that a Russian bomb had killed two people in NATO state Poland. This development raised the market's anxiety level about the geopolitical situation and potential for a wider conflict in Russia's war with Ukraine. However, follow-up intelligence reports suggested the missiles were not fired by Russia and there wasn't any deliberate action here. That finding helped mitigate the angst surrounding the initial report. 

Also, the cryptocurrency market continues to be in focus as more news emerges about the FTX meltdown.

Only three S&P 500 sectors squeezed out a gain this week, utilities (+0.8%), health care (+1.0%), and consumer staples (+1.7%). On the flip side, energy (-2.4%) and consumer discretionary (-3.2%) were the biggest losers.

• Dow Jones Industrial Average: UNCH for the week / -7.1% YTD

• S&P Midcap 400: -0.9% for the week / -11.7% YTD

• Russell 2000: -1.8% for the week / -17.6% YTD

• S&P 500: -0.7% for the week / -16.8% YTD

• Nasdaq Composite: -1.6% for the week / -28.8% YTD

Market Recap - October CPI report clears the way for a huge week of gains

The Week That Just Concluded Was Some Kind Of Week. There Was Turmoil (And Massive Losses) In The Cryptocurrency Market As FTX Was Outed For Facing A Liquidity Crunch. The Week Ended With FTX Group Stunningly Filing For Chapter 11 Bankruptcy. That Wasn't Even The Half Of It.

There was a midterm election on Tuesday, the final results of which are still unknown as of this writing. Reports suggests the GOP will manage to claim a narrow majority in the House, yet some Senate races are still too close to call. In fact, it might take the December 6 runoff election in Georgia to determine if Democrats or Republicans have control of the Senate.

With the GOP holding a narrow majority in the House, though, it is evident that the next few years likely won't include any new major spending plans or tax hikes. In other words, there will be legislative gridlock for the next few years unless the two parties work together to avoid being labeled a "do nothing Congress."

The stock market this week was anything but a "do nothing market." It was filled with trading excitement that produced the best day for the market on Thursday since 2020 and some huge gains for the major indices.

The main catalyst for the excitement was the October CPI report, which came in better than expected and much better than feared.

Briefly, total CPI increased 0.4% month-over-month in October (Briefing.com consensus 0.7%) while core-CPI, which excludes food and energy, increased 0.3% month-over-month (Briefing.com consensus 0.5%). The monthly changes left total CPI up 7.7% year-over-year, versus 8.2% in September, and core CPI up 6.3% year-over-year, versus 6.6% in September.

The key takeaway from the report wasn't singular. It was manifold: (1) The report helped validate the peak inflation view. (2) The report is apt to compel the Fed to take a less aggressive rate-hike approach at the December FOMC meeting. (3) Some encouragement was borne out of the understanding that the shelter index (computed with a lag) contributed more than half of the monthly all items increase, suggesting price increases moderated in many other areas.

This welcome inflation news, combined with a huge drop in the dollar and market rates, launched an epic rally. The Nasdaq Composite for its part soared 7.4% on Thursday. Many of the beaten-up growth stocks made double-digit percentage moves, including Amazon.com, but just about every stock came along for the CPI ride.

Growth stocks, though, were the favored rebound candidates as the 10-yr note yield dove 31 basis points to 3.84%. The 2-yr note yield, which is sensitive to changes in the fed funds rate, plunged 32 basis points to 4.31%.

Those moves were precipitated by changing rate-hike expectations. The fed funds futures market now sees an 83.0% probability of a 50-basis points rate hike at the December FOMC meeting (versus 56.8% before the CPI data) and a terminal rate of 4.75-5.00% by June (versus 5.00-5.25% before the CPI data). 

The dollar got clobbered on those same shifting expectations. The U.S. Dollar Index fell a whopping 4.0% on the week to 106.42.

The drop in the dollar took some of the pressure off the multinationals and aided in the belief that downward revisions to 2023 earnings estimates may not be as severe as feared, assuming the weakness persists.

Another factor aiding that belief was a Bloomberg report that China relaxed quarantine guidelines for inbound travelers and is aiming to avoid city-wide testing when COVID transmission chains are clear. This news, which came on Friday, helped boost oil and copper prices.

It also added to the market's newfound enthusiasm for a year-end rally. The S&P 500, which dipped below 3,500 following the disappointing September CPI report in mid-October, peeked its head above 4,000 on Friday and closed just below that level when the final bell for the week rang.

All 11 S&P 500 sectors logged a gain this week, none bigger than the information technology sector (+10.0%), which was driven by a huge comeback effort among the semiconductor stocks and by Apple (AAPL) and Microsoft (MSFT). For the week, the Philadelphia Semiconductor Index was up 14.9%.

Other standouts included the communication services (+9.2%), materials (+7.7%), real estate (+7.1%), consumer discretionary (+5.9%), and financial (+5.7%) sectors. The weakest performers were the defensive-oriented health care (+1.8%) and utilities (+1.4%) sectors.

• Dow Jones Industrial Average: +4.1% for the week / -7.1% YTD

• S&P Midcap 400: +5.3% for the week / -10.9% YTD

• Russell 2000: +4.6% for the week / -16.1% YTD

• S&P 500: +5.9% for the week / -16.2% YTD

• Nasdaq Composite: +8.1% for the week / -27.6% YTD

Market Recap - STOCKS FALL IN POST-FOMC RETREAT

October Came To An End On Monday And The Dow Jones Industrial Average Logged Its Best Monthly Performance Since 1976 With A Gain Of 14.0%. The Stock Market Was Due For A Period Of Consolidation After A Big Run, Which Picked Up Steam As The Week Progressed.

The major averages clung to a fairly narrow trading range in the first half of the week as market participants played a waiting game ahead of the FOMC policy decision on Wednesday and Fed Chair Powell's subsequent press conference. 

The big run in October was partially predicated on the notion that the Fed might soften its approach after the November meeting. The following line in the policy directive from Wednesday added fuel to that notion:

"In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

Market participants quickly adjusted to the reality that the Fed is apt to raise rates higher than expected for longer than expected. Fed Chair Powell said at his press conference, "When (people) hear lags, they think about a pause. It's very premature in my view to be thinking about or talking about pausing our rate hike. We have a way to go. We need ongoing rate hikes to get to that level of restrictive. We don't know where that exactly is."

Mr. Powell was also struck by how resilient the labor market has been, noting that the unemployment rate is still sitting near a 50-year low and that wage inflation, while flattening out, is still well above the level that would be consistent over time with 2.0% inflation.

The October Employment Report reflected a labor market that isn't showing enough weakness yet to convince the Fed that it can stop raising the target range for the fed funds rate. That point notwithstanding, the October employment situation was more consistent with achieving a soft landing for the economy than a hard landing.

Other economic data of note this week included the ISM Manufacturing Index for October. That report reflected a moderation in manufacturing activity that borders on contractionary territory, which hasn't been seen since the pandemic-led contractions in April and May 2020. The ISM Non-Manufacturing Index for October showed that business activity for the non-manufacturing sector, which comprises the largest swath of U.S. economic activity, softened in October at the same time price pressures remained elevated.

Treasury yields were on the rise in anticipation of Wednesday's FOMC decision, but yields really moved up after that. The 2-yr Treasury note yield rose 25 basis points this week to 4.67%. The 10-yr note yield rose 15 basis points this week to 4.16%.

Other central banks made headlines this week aside from the Fed. European Central Bank (ECB) President Lagarde said that recession risk in the eurozone has increased, and that inflation is too high. ECB policymaker Nagel said that the ECB has a long way to go on rate hikes and that the central bank should begin reducing its bond portfolio at the start of 2023. The Reserve Bank of Australia raised its cash rate by 25 bps to 2.85%, as expected. The Norges Bank raised its key rate by 25 bps to 2.50% and the Bank of England raised its key rate by 75 basis points to 3.00%.

Market participants received earnings reports from over one third of the companies in the S&P 500 this week. Per usual, there were some big winners and big loser, yet macro factors tended to overshadow the individual earnings reports.

Growth stocks struggled this week, which were afflicted by rising interest rates, weak guidance in a number of cases, and the shift out of the mega-cap darlings. The Vanguard Mega Cap Growth ETF fell 6.8% this week. Apple and Amazon.com were among the losing standouts for the group. 

Meanwhile, Chinese stocks were a pocket of strength this week as speculation circulated that China will ultimately relax its zero-COVID policy. JD.com and Alibaba were among the biggest winners for Chinese stocks. 

Energy stocks were another pocket of strength in the market. The S&P 500 energy sector closed with the biggest weekly gain, up 2.4%, as WTI crude oil futures rose 5.4% to $92.60/bbl. Only two other sectors out of the 11 total were able to squeeze out a gain on the week. Industrials rose 0.4% and materials rose 0.9%.

The dollar had a whipsaw week. The U.S. Dollar Index was inching higher all week until taking a sharp turn lower Friday as other major currencies registered big gains against the greenback (EUR/USD +2.1% to 0.9960). The U.S. Dollar Index closed the week unchanged. 

• Dow Jones Industrial Average: -1.4% for the week / -10.8% YTD

• S&P Midcap 400: -1.2% for the week / -15.4% YTD

• S&P 500: -3.4% for the week / -20.9% YTD

• Russell 2000: -2.6% for the week / -19.8% YTD

• Nasdaq Composite: -5.7% for the week / -33.0% YTD

Market Recap - Mega caps fall, but indices rise

It Was, Generally Speaking, A Strong Week For The Stock Market. Mega Cap Stocks, Which Have Been Looked At For So Long As Highly Robust, Fell Off Sharply As Earnings News Rolled In This Week.

Apple was a rare exception among the tech giants, trading up after reporting quarterly results. Meta Platforms, Alphabet, Microsoft, and Amazon all suffered heavy losses on the heels of their respective earnings reports.

The struggling mega caps didn't weigh as hard on the broader market as one might expect. A pack of blue chip companies provided a welcome distraction with good earnings news and guidance. Honeywell and Caterpillar were two of the biggest beneficiaries of this rotation out of the mega cap stocks. 

Interest in names like Caterpillar and Honeywell led the S&P 500 industrials sector to close with the biggest weekly gain, up 6.7%. Other top performing sectors this week included utilities (+6.5%), financials (+6.2%), and real estate (+6.2%).

Meanwhile, the losses incurred by Meta Platforms and Alphabet drove the communication services sector to close down 2.9% on the week. It was the only sector to end the week with a loss. Another top laggard was the consumer discretionary sector (+0.7%). The remaining six sectors all closed with gains of at least 2.8%.

Small cap stocks were a specific pocket of strength this week. The Russell 2000 gained 6.0%, which was more than the three major averages. 

Other notable movers included Chinese stocks, and U.S. stocks with high exposure to the Chinese market, which sold off sharply in the first half of the week. This followed President Xi Jinping securing an unprecedented, third five-year term to serve as China's leader. That wasn't surprising, but it did come as a shock to many investors that he managed to surround himself only with loyalists who are apt to help him pursue tighter regulations and the continuation of China's zero-Covid policy. 

JD.com and Pinduoduo were losing standouts for Chinese stocks while Las Vegas Sands and Starbucks also suffered heavy selling on concerns related to Xi's power grab. By the end of the week, however, these names were able to reclaim some of their losses. 

There is a growing belief among market participants that the Fed will soften its approach after the November meeting. The policy move from the Bank of Canada this week further fueled this notion. The Bank of Canada raised its key policy rate by 50 basis points versus an expected 75 basis points. The European Central Bank, however, delivered a 75 basis point increase for its key policy rates, as expected.

Market participants digested a slew of economic data this week that both supported and undermined the notion that the Fed will soften its approach soon. Some of the data releases included:

• September Personal Income 0.4% (Briefing.com consensus 0.3%); Prior was revised to 0.4% from 0.3%; September Personal Spending 0.6% (Briefing.com consensus 0.4%); Prior was revised to 0.6% from 0.4%;

• September PCE Prices 0.3% (Briefing.com consensus 0.3%); Prior 0.3%; September PCE Prices - Core 0.5% (Briefing.com consensus 0.4%); Prior 0.5%

  • The key takeaway from the report is that with continued income growth and a slightly hotter than expected Core PCE price growth, the Fed has an argument to maintain its aggressive rate hike course.

• Weekly Initial Claims 217K (Briefing.com consensus 220K); Prior was revised to 220K from 214K; Weekly Continuing Claims 1.438 mln; Prior was revised to 1.383 mln from 1.385 mln

  • The key takeaway from the report is that the initial claims data suggest the labor market continues to hold up well, which of course is something that will continue to draw the Fed's attention.

• Q3 GDP-Adv. 2.6% (Briefing.com consensus 2.3%); Prior -0.6%; Q3 Chain Deflator-Adv. 4.1% (Briefing.com consensus 5.3%); Prior 9.0%

  • The key takeaway from the report is that it ends a two-quarter streak of negative GDP prints. It also suggests the economy held up well in the third quarter as it started to acclimate to rising interest rates. Real final sales of domestic product, which excludes the change in private inventories, increased a solid 3.3%.

• October Consumer Confidence 102.5 (Briefing.com consensus 105.5); Prior was revised to 107.8 from 108.0

  • The key takeaway from the report is that consumers' concerns about inflation picked up again in October on the back of rising gas and food prices.

Falling Treasury yields were a big support factor for the stock market. The 10-yr Treasury note yield dipped below 4.00%, but ultimately settled the week down 20 basis points at 4.01%. The 2-yr note yield fell nine basis points to 4.42%.

In other news, Rishi Sunak was elected UK Prime Minister.

• Dow Jones Industrial Average: +5.7% for the week / -9.6% YTD

• S&P Midcap 400: +5.3% for the week / -14.3% YTD

• S&P 500: +4.0% for the week / -18.2% YTD

• Russell 2000: +6.0% for the week / -17.7% YTD

• Nasdaq Composite: +2.2% for the week / -29.0% YTD