Market Recap - Market holds up on busy week of earnings and economic data

The Week Got Started On A Softer Note As Investors Took Some Money Off The Table Following A Strong Showing This Month. Entering Monday, The Nasdaq And S&P 500 Were Up 11.0% And 6.0%, Respectively, In January.

The early weakness was precipitated by an article in The Wall Street Journal by Nick Timiraos indicating that Fed officials were concerned that inflation could reaccelerate due to tight labor markets. Mr. Timiraos added in a Monday article that the Fed's interest rate strategy could depend on how much members believe the economy will slow.

There was also an element of trepidation behind Monday's weak showing ahead of several market-moving data releases, including the Q4 Employment Cost Index, the January ISM releases, and the January Employment Situation Report. In addition, market participants were cognizant that more than 100 S&P 500 companies would be reporting earnings this week, headlined by Meta Platforms, Apple, Alphabet, and Amazon.com.

Sentiment started to shift on Tuesday as investors looked intent on closing out a strong month on an upbeat note. Participants were also driven by a sense that the Fed may be compelled to pause its rate hikes in the near future following a pleasing Q4 Employment Cost Index and some weaker-than-expected January Chicago PMI and Consumer Confidence data.

The latter point was corroborated in a Wall Street Journal article by Nick Timiraos that suggested the Employment Cost Index report could increase the possibility of Fed officials agreeing to pause the rate hikes sooner rather than later. 

A strong rebound effort took root on Wednesday. This followed the FOMC's unanimous decision to raise the target range for the fed funds rate by 25 basis points to 4.50-4.75%, as expected, and Fed Chair Powell's press conference, where did not go out of his way to rein in the market's rebound enthusiasm. 

Mr. Powell acknowledged that the "Full effects of rapid tightening so far have yet to be felt and we have more work to do." He indicated that core services inflation is still running too high, which creates a basis for ongoing rate hikes. Overall, though, Mr. Powell was generally encouraging about the emerging signs of disinflation.

Importantly for market participants, he did not condemn loosening financial conditions and maintained that he thinks there is a path to getting inflation back down to 2.0% without a really significant economic decline or significant increase in unemployment.

A huge earnings-driven gain in Meta Platforms fueled a continuation of the rally effort at the start of Thursday's session. Meta's pleasing results on the heels of Fed Chair Powell's press conference, where he took a less aggressive tone, fueled a sense that earnings growth and monetary policy may be better than feared this year.

Positive reactions to some data releases Thursday morning also helped along the upside bias. A pleasing Q4 Productivity report, which featured a moderation in unit labor costs, left the market feeling good about inflation trends. Separately, weekly initial jobless claims hit their lowest level (183,000) since April 2022, but that did not deter the rally effort, as it was construed as another good portent for a possible soft landing.

The rally did hit an air pocket, though, when the S&P 500 failed to clear the 4,200 level. The pullback was likely driven by a feeling that the market had gotten overbought/overextended and was due for some consolidation. The downturn did not last long, however, and the main indices were able to climb back towards session highs ahead of Thursday's closing bell.

To be fair, a sizable loss in Merck following its quarterly results kept the price-weighted Dow Jones Industrial Average in negative territory for most of Thursday's session.  

The final session of the week turned out to be a losing session with disappointing earnings and/or guidance from Alphabet, Amazon.com, Starbucks, and Ford dictating the action along with a surprisingly strong gain in January nonfarm payrolls (+517,000) and a stronger than expected January ISM Services PMI (55.2%) that marked a return to growth mode.

The strong data created some doubts as to whether the Fed will pause its rate hikes soon and cut rates at all before the end of the year. 

Treasuries sold off sharply in response to the data releases. The 2-yr note yield rose 21 basis points to 4.29% and the 10-yr note yield rose 14 basis points to 3.53%. The U.S. Dollar Index rose 1.2% to 102.96. Separately, the fed funds futures market is now accounting for the prospect of a third 25 basis point rate hike in May. According to the CME FedWatch Tool, the probability of a rate hike in May, in addition to the one that is fully priced in for March, increased to 61.8% from 30.0% yesterday.

Many stocks pulled back on profit-taking efforts following the earnings and economic news. Apple, however, which also came up shy of earnings estimates for the December quarter, was not among them. Granted Apple declined 2.0% off the open but quickly rebounded and finished the day up 2.4% as investors seemingly believed its shortcomings would be short lived.

Only three S&P 500 sectors registered losses this week -- energy (-5.9%), health care (-0.1%), and utilities (-1.5%) -- while the communication services (+5.3%), information technology (+3.8%), and consumer discretionary (+2.3%) sectors logged the biggest gains. 

·    Nasdaq Composite: +3.3% for the week / +14.7% YTD

·    Russell 2000: +3.9% for the week / +12.7% YTD

·    S&P Midcap 400: +3.4% for the week / +11.4% YTD

·    S&P 500: +1.6% for the week / +7.7% YTD

·    Dow Jones Industrial Average: -0.2% for the week / +2.4% YTD

Market Recap - January rally still riding high as earnings season rolls on

Things got started on an upbeat note on Monday after a Wall Street Journal article over the weekend by Nick Timiraos highlighted the possibility of the Fed pausing its rate hikes this spring, along with a recent survey of businesses by the NABE that conveyed a lower possibility (56% vs nearly two-thirds before) of the U.S. being in a recession or entering one.

The market hit some turbulence on Tuesday with a lot of aberrant stock prices for a number of NYSE-listed stocks. The aberrations led almost instantly to volatility halts with market participants/observers wondering what was happening. The official explanation turned out to be an "exchange-related issue." That issue, fortunately, got resolved quickly and stocks soon returned to trading in a normal manner.

The NYSE declared a number of trades as erroneous from Tuesday morning and some trades were busted that traded outside of trading bands.

Market participants were also digesting some disappointing earnings/guidance from the likes of 3M, Verizon, Union Pacific, and General Electric, along with the news that the U.S. filed an antitrust lawsuit against Google over alleged dominance in digital advertising.

Defense-related companies Lockheed Martin and Raytheon Technologies reported pleasing quarterly results, which helped offset some weakness.

There was also an element of geopolitical angst in play midweek after Germany and the U.S. reached an agreement to supply tanks to Ukraine for its fight against Russia.

Price action on Wednesday was integral to keeping the rally effort alive this week. Valuation concerns following Microsoft's disappointing fiscal Q3 outlook and expected growth deceleration for its Azure business fueled a broad retreat to kick off the session.

Investors also had a negative reaction initially to results and/or guidance from the likes of Dow component Boeing, Texas Instruments, Kimberly-Clark, and Norfolk Southern while Capital One went against the grain after its earnings report. 

Sentiment started to shift, however, when buyers showed up fairly quickly after the S&P 500 slipped below its 200-day moving average. Most stocks either narrowed their losses or completely recovered and closed the session with a gain.

Following Wednesday's strong reversal, Tesla reported strong quarterly results and outlook, which drove a continued rebound in the mega cap space, and Chevron announced a massive $75 billion stock repurchase program announcement.

There was also a slate of pleasing data releases Thursday morning that helped support a positive bias. Namely, the Advance Q4 GDP Report, weekly initial jobless claims, and December durable goods orders all came in better than expected.

The upside moves accelerated in the afternoon trade likely driven by some short-covering activity and a fear of missing out on further gains.

The rally effort continued on Friday despite Intel reporting ugly results and guidance, KLA Corp. issuing below-consensus guidance, Chevron missing on earnings estimates, and Hasbro issuing a Q4 profit warning.

Market participants received some relatively pleasing inflation data in the December Personal Income and Spending Report.

Briefly, the PCE Price Index was up 0.1% month-over-month (Briefing.com consensus 0.0%) while the core-PCE Price Index, which excludes food and energy, was up 0.3%, as expected. That left the year-over-year changes at 5.0% and 4.4%, respectively, versus 5.5% and 4.7% in November.

There was a sharp pullback ahead of Friday's close, however. Market participants most likely wanted to take some money off the table following a big run and ahead of a big week of market moving catalyst next week that will include, among other things, the FOMC decision, earnings reports from Alphabet, Meta Platforms, Apple, and Amazon.com, followed by the January Employment Report.

Only two S&P 500 sectors registered losses this week -- utilities (-0.5%) and health care (-0.9%) -- while the consumer discretionary (+6.4%), information technology (+4.1%), and communication services (+3.3%) sectors led the outperformers. 

The 2-yr Treasury note yield rose one basis point this week to 4.21% and the 10-yr note yield rose four basis points this week to 3.52%.

·    Nasdaq Composite: +4.3% for the week / +11.0% YTD

·    Russell 2000: +2.4% for the week / +8.5% YTD

·    S&P Midcap 400: +2.4% for the week / +7.8% YTD

·    S&P 500: +2.5% for the week / +6.0% YTD

·    Dow Jones Industrial Average: +1.8% for the week / +2.5% YTD

Market Recap - 2023 rally hits an air pocket

In addition, growth and rate hike concerns, which had been put on the backburner to start the year, seemed to be back in play. 

The market initially reacted positively on Wednesday to the welcome slowdown in inflation reflected in the December Producer Price Index (PPI) (actual -0.5%; Briefing.com consensus -0.1%). Any optimism that may have come from the pleasing PPI report quickly dissipated, though, as investors digested the weak retail sales and manufacturing data from December.

Briefly, retail sales fell 1.1% month-over-month in December (Briefing.com consensus -0.8%) after falling a revised 1.0% in November (from -0.6%) and industrial production decreased 0.7% month-over-month in December (Briefing.com consensus -0.1%) after decreasing a revised 0.6% in November (from -0.2%).

The main indices sold off on Wednesday due to the understanding that the Fed is likely to remain on its rate hike path in spite of a weakening economic backdrop, increasing the risk for a policy mistake to trigger a deeper setback. Selling efforts had the S&P 500 take out support at its 200-day moving average.

Market participants also received official commentary on the economy when the FOMC released its latest Beige Book at 14:00 ET Wednesday. On balance, contacts generally expected little growth in the months ahead.

St. Louis Fed President Bullard (non-FOMC voter) added fueled the market's concerns saying that he would prefer that the Fed stay on a more aggressive path, according to CNBC, but added that the prospects for a soft landing have improved.

Thursday's trade looked a lot like Wednesday's trade with investors reacting to more data and commentary pointing towards weakening growth and the possibility of the Fed making a policy mistake.

Building permits decreased for the third consecutive month in December (actual 1.330 mln; Briefing.com consensus 1.370 mln). That report, however, contained one positive element, as single-family starts grew 11.3% month-over-month.

Weekly initial claims were released at the same time, which decreased to their lowest level since late September (actual 190,000; Briefing.com consensus 212,000), implying no new difficulties in the labor market that could put a quick stop to the Fed’s hiking cycle.

JPMorgan Chase CEO Jamie Dimon said in a CNBC interview Thursday morning “I think there’s a lot of underlying inflation, which won’t go away so quick,” adding that he thinks rates will top 5.0%.

As earnings season progresses, the main sticking point for stock market participants is the potential that weaker growth will translate to further cuts to earnings estimates.

Dow component Goldman Sachs sold off sharply on Tuesday after reporting below-consensus earnings and revenue, along with increased provisions for credit losses.

So far, however, quarterly results have generally received positive reactions from investors. In contrast to Goldman Sachs, Morgan Stanley received a favorable reaction despite a Q4 earnings miss.

Another notable name that reported earnings was Netflix, which surged 8.5% on Friday and led to renewed interest in the tech space. This helped drive the sentiment shift that fueled a strong rally effort on Friday.

The rebound effort to close out the week had the Nasdaq Composite recoup all of its losses while the S&P 500 and Dow Jones Industrial Average put a nice dent in their weekly losses. The S&P 500 was able to climb back above its 200-day moving average by Friday's close.

Only three S&P 500 sectors were able to log a gain this week -- communication services (+3.0%), energy (+0.7%), and information technology (+0.7%) -- while the industrials (-3.4%), utilities (-2.9%), and consumer staples (-2.9%) sectors suffered the steepest losses.

The 2-yr Treasury note yield fell two basis points this week to 4.20% and the 10-yr note yield fell three basis points to 3.48%. The U.S. Dollar Index fell 0.2% to 101.99.

WTI crude oil futures rose 2.3% to $81.69/bbl and natural gas futures fell 5.3% to $3.03/mmbtu.

Separately, Treasury Secretary Yellen notified Congress via a letter that the debt ceiling has been reached, prompting the Treasury Department to begin employing extraordinary measures.

·    Nasdaq Composite: +0.6% for the week / +6.4% YTD

·    Russell 2000: -1.0% for the week / +6.0% YTD

·    S&P Midcap 400: -0.9% for the week / +5.3% YTD

·    S&P 500: -0.7% for the week / +3.5% YTD

·    Dow Jones Industrial Average: -2.7% for the week / +0.7% YTD

Market Recap - Off to a strong start in 2023

Market participants settled into a wait-and-see style trade in the first half of the week in front of Fed Chair Powell's speech on Tuesday, the December Consumer Price Index (CPI) on Thursday, and bank earnings reports on Friday that marked the official start to the Q4 earnings reporting season.

Fed Chair Powell gave a speech titled "Central Bank Independence" Tuesday morning. Investors may have felt emboldened because Mr. Powell did not purposely kill the market's rebound activity in his speech. He did, however, acknowledge that, "...restoring price stability when inflation is high can require measures that are not popular in the short term as we raise rates to slow the economy."

The latter point notwithstanding, the S&P 500 was able to close above technical resistance at its 50-day moving average. 

By Thursday's open, market participants were digesting the much-anticipated December CPI report. It was in-line with the market's hopeful expectations that it would show continued disinflation in total CPI (from 7.1% year/year to 6.5%) and core CPI (from 6.0% year/year to 5.7%).

Those were pleasing headline numbers, but it is worth noting that services inflation, which the Fed watches closely, did not improve and rose to 7.5% year/year from 7.2% in November.

That understanding did not seem to hold back the stock or bond market. The price action in those markets on Thursday generally supported the view that the Fed will pause its rate hikes sooner rather than later. In fact, the fed funds futures market now prices in a 67.0% probability of the target range for the fed funds rate peaking at 4.75-5.00% in May versus 55.2% a week ago, according to the CME FedWatch Tool.

The positive price action in the stock market was particularly notable considering the big move leading up to the CPI report. The S&P 500 was up 3.7% for the year entering Thursday and up 4.4% from its low of 3,802 on January 5.

When Friday's trade began, though, market participants decided to take some profits following the big run. Ahead of the open, Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup reported mixed quarterly results relative to expectations that featured increased provisions for credit losses. Those stocks languished out of the gate, as did the broader market, but true to form so far in 2023, buyers returned and bought the weakness. Before long the bank stocks were back in positive territory and so was the broader market.

The S&P 500 moved above its 200-day moving average (3,981) on the rebound trade and closed the week a whisker shy of 4,000. 

Only two of the S&P 500 sectors closed with a loss this week -- health care (-0.2%) and consumer staples (-1.5%) -- while the heavily weighted consumer discretionary (+5.8%) and information technology (+4.6%) sectors logged the biggest gains. 

The 2-yr Treasury note yield fell five basis points to 4.22% and the 10-yr note yield fell six basis points to 3.51%. The U.S. Dollar Index fell 1.6% this week to 102.18. 

WTI crude oil futures made strides to the upside this week rising 8.5% to $80.06/bbl. Natural gas futures fell 4.8% to $3.23/mmbtu. 

·    Russell 2000: +5.3% for the week / +7.1% YTD

·    S&P Midcap 400: +3.7% for the week / +6.2% YTD

·    Nasdaq Composite: +4.8% for the week / +5.9% YTD

·    S&P 500: +2.7% for the week / +4.2% YTD

·    Dow Jones Industrial Average: +2.0% for the week / +3.5% YTD

Market Recap - Friday’s rally leaves market higher for the week

With Wednesday's higher finish, the market logged a net gain over the Santa Claus rally period (the last five trading sessions of the year and the first two trading sessions of the new year), which, historically has been regarded as a positive sign for the start of the new year. 

The major indices experienced some choppy action this week, though, driven by expectations surrounding the Fed's rate hike path. Those expectations were influenced by notable economic releases this week. 

A stronger-than-expected ADP Employment Change Report for December and initial jobless claims for the week ending December 31, which hit their lowest level since September, indicated that the labor market remains tight. Simultaneously, a sharp narrowing in the November trade deficit that was led by declines in both exports and imports reflected weakening global demand.

Investors are aware that the Fed considers a weakening of the labor market to be an integral step in bringing down inflation, so strong labor data left market participants fearful about the Fed continuing to raise rates and not entertaining a pivot to a rate cut cycle anytime soon. 

Minneapolis Fed President Kashkari (a 2023 FOMC voter) said that he sees the Fed pausing its rate hikes at 5.40% before cautioning that rates could be taken potentially much higher from wherever the Fed pauses if there is slow progress in lowering inflation after the Fed pauses.

The FOMC Minutes from the December 13-14 meeting, which were released on Wednesday following Mr. Kashkari's remarks, indicated "No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023."

Kansas City Fed President George (not an FOMC voter), meanwhile, told CNBC in an interview on Thursday that she sees the fed funds rate reaching 5.0% and staying there "well into 2024." The same day, St. Louis Fed President Bullard (not an FOMC voter) said, "While the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer." 

The market languished on Thursday following the ADP and initial claims numbers, leaving participants fearful about the December Employment Situation Report being stronger than expected. 

It turned out that the employment report was not as strong as feared, but it also was not weak. Nonetheless, the market took a liking to the understanding that average hourly earnings growth moderated to 4.6% year-over-year in December versus a downwardly revised 4.8% in November.

That report was subsequently followed by the December ISM Non-Manufacturing Index, which fell into contraction territory (i.e. a sub-50 reading) for the first time since May 2020. The downturn reflected a clear slowdown in economic activity that is a byproduct of rising interest rates and weakening demand.

The takeaway for the Treasury and stock markets in the wake of this softer data was that the Fed won't be able to take the target range for the fed funds rate much higher before it decides to hit the pause button. Accordingly, both markets enjoyed substantive rallies to finish the week.

The 2-yr note yield fell 15 basis points for the week to 4.27% and the 10-yr note yield fell 32 basis points for the week to 3.56%.

The bulk of the weekly gains came in Friday's rally. Nine of the 11 S&P 500 sectors closed with a gain led by communication services (+3.7%), materials (+3.5%), and financials (+3.3%). Meanwhile, the energy sector closed flat and health care fell 0.2%.

The mega cap stock had a roller-coaster week fueled by notable news catalysts. Tesla disappointed with Q4 deliveries and reportedly cut prices again in China for its Model Y and Model 3 vehicles. Apple reportedly told suppliers to build fewer components for several devices in Q1 due to weakening demand. Amazon.com announced plans to cut ~18,000 positions.

Another story stock of note was Dow component Salesforce, which announced it will be pursuing a restructuring effort that will include the elimination of roughly 10% of its staff and select real estate exits and office space reductions.

·    S&P Midcap 400: +2.4% for the week / +2.4% YTD

·    Russell 2000: +1.8% for the week / +1.8% YTD

·    S&P 500: +1.5% for the week / +1.5% YTD

·    Dow Jones Industrial Average: +1.5% for the week / +1.5% YTD

·    Nasdaq Composite: +1.0% for the week / +1.0% YTD

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