Wentz Weekly Insights
2022’s Roller Coaster Ride Continues
It was a quiet week in U.S. markets last week as investors had a holiday shortened week. In fact, Friday saw the lowest trading volume since December 26, 2019, according to Barron’s and Dow Jones Market Data. By the end of the week, the S&P 500 gained 1.53% while value stocks, more specifically defensive stocks, led the way with the Dow adding 1.78%.
Since the market lows on October 13, stocks have rallied 15.3%. While that is a big move, similar moves have happened four other times already in this volatile year. The S&P 500 has experienced five significant price swings this year. The first occurred in January with a drawdown of 12.4%, followed by an 8.7% bounce. Out of the five swings in the S&P 500, the average drawdown has been 14.6%, with the steepest being the most recent drawdown from August to the recent October low. On the other hand, the average bounce is 13.1% with the strongest being the summer rally from June to August.
As mentioned, the most recent leg higher is 15.3%, just over the average 13.1% this year. Now, the S&P 500 is facing a key technical level – the 200 day moving average, which is around 4060. Technical analysts see this as a key level to break for stocks to move higher. However, if stocks fail to break this level there could be another leg lower.
After a quiet holiday week, there are several market moving events coming up that could be the catalyst for the market’s next move. The first is Jerome Powell’s public appearance this Wednesday when he speaks on the Economic Outlook, Inflation, and the Labor Market at the Brookings Institution. We expect him to provide hints of a 50 basis point increase at the Fed’s December 13-14 meeting, but remaining tough in his tone on inflation, which should provide a ceiling for stocks, for now. After that we will see data on the Fed’s preferred measure of inflation – the personal consumption expenditure price index. The index is expected to increase 0.4% in October, accelerating from a 0.3% increase in September. Then, the November employment report comes out Friday morning where another 220,000 jobs are expected to have been added in the month. Solid economic data and higher inflation would be more of a reason for the Fed to stay aggressive, but any weakening will be taken as a reason for the Fed to take its foot off the brakes.
The other thing to watch is the 10-year Treasury yield. Stocks most recent rally has been driven by a significant drop in Treasury yields. After peaking at 4.33% on October 20, right around the same time the market bottomed, the 10-year Treasury yield has fallen to 3.69% (leading to a substantial inversion of the yield curve as we wrote about last week). As recession worries increase, the yield has fallen over the expectation the Fed will have to pivot and cut rates to avoid a more severe recession and stimulate growth again.
In the end, the Fed is slowing rate increases and nearing the end of its rate hike cycle. Stocks, being forward looking, are anticipating this and have moved higher as a result. However, there is still work left to do, according to many Fed policymakers, and higher inflation, or stronger economic data, could give Fed more reason to move the peak rate higher than projected, as they have already done multiple times this year. Until we have more clarity, we expect defensive and income producing investments to continue to be in favor.
Week in Review:
Stocks opened the holiday shortened week with new worries about Covid after China reported nearly 25,000 new cases and three new deaths, the first since May, resulting in the government implementing new restrictions. The increase is being seen in some of the largest cities as well, which is troubling as China was moving closer to easing its zero covid approach. Elsewhere, oil was down as much as 6% after the WSJ reported the Saudis and other oil producing nations were discussing raising production at the next meeting, but closed down less than 1% after Saudi Arabia denied the report. More Fed speak for the day was mixed, but the overall theme has been slowing rate hikes. Growth underperformed again with stocks down 0.39%.
Stocks were able to rebound Tuesday, finishing near the best levels of the day with the S&P 500 gaining 1.36%. It was more of a quiet day, but helping stocks was additional support for a slower pace of rate increases from Fed officials, along with better than expected earnings.
It was a much busier Wednesday, on both the economic and earnings calendar. Covid worries in China continued, with additional restrictions and concerns about more wide-scale lockdowns. Most economic data was positive, beside manufacturing surveys, while earnings were again better than feared, while the FOMC meeting minutes showed no surprise, with policymakers discussing a slowdown in the pace of future rate increases, but some discussing the need for a higher terminal rate. It was enough to push stocks higher again, with Treasury yields falling to the lowest levels since summer, as the S&P 500 gained another 0.59%.
It was a quiet day on Friday, with markets opened for a half day. In fact, total composite volume, which includes the NYSE, NASADQ, NYSE American, and NYSE Arca, at 4.59 billion shares was the lowest volume day since December 26, 2019, according to Barron’s and Dow Jones Market Data. The Covid outbreak in China continued to receive much of the attention with a new daily record, along with China’s central bank cutting a key benchmark rate 25 basis points in effort to add liquidity to its economy. The S&P 500 closed unchanged to cap off a 1.53% gain on the week.
Recent Economic Data
- Orders for durable goods increased 1.0% October, double what was expected and rising seven of the past eight months. Excluding the volatile transportation category, orders were still 0.5% higher. Orders of non-defense capital goods, a proxy of capital spending by businesses, rebounded from a disappointing September, rising a solid 1.9% in the month, with shipments up 1.3%.
- The number of unemployment claims filed last week increased 17,000 to 240,000, the highest since August. The four-week average was 226,750, an increase of 5k. Continuing claims continue to move higher, at 1.551 million last week for an increase of 48k from the prior week and the highest since March, with the four-week average at 1.510 million.
- Sales of newly built homes in October was at an annual rate of 632,000, better than expected with a 7.5% increase from September’s level but 5.8% below the level a year earlier. Driving the beat was higher sales in the South, which may represent a rebound from September after hurricane Ian disrupted sales. The supply of new homes has improved for ten consecutive months as potential buyers reassess the current environment, with 8.9 months supply on the market at the current sales pace. The median sales price saw a large increase, up 8.2% in the month and 15.4% from a year ago to $493,000.
- The final read on the University of Michigan’s consumer sentiment survey showed consumers’ outlook weakened in the second half of November with the index falling to 56.8 from 59.9 in October and back near the record low of 50.0 recorded in June. The index for current conditions fell to 58.8 from 65.6, while the expectations index to 55.6 from 56.2. The more important reading of inflation expectations was welcoming – the one-year ahead inflation expectation was 4.9%, down from 5.0% last month, with the five-year ahead expectation at 3.0%, up from 2.9%.
- New Disney CEO Bob Iger had released a company memo regarding the start of its restructuring plans, including organizational and operational changes that will put more of the decision making in the hands of the creative teams, along with rationalizing costs.
- Sofi stock fell after a group of Senators sent letters to financial regulators asking them to review its cryptocurrency trading activities as they may be violating regulatory requirements.
- Video game developer Activision Blizzard was lower last week after reports said the FTC is likely to file an antitrust lawsuit as soon as next month to block Microsoft’s acquisition of the company. The FTC is skeptical of the company’s arguments for the transaction, the report says. Microsoft announced in January it would acquire Activision Blizzard for $69 billion in the year’s largest announced acquisition.
- The e-commerce platform for online stores, Shopify, announced its Black Friday sales figures with $3.36 billion in gross merchandise volume, up 17% from a year ago. This is better than Shopify’s non-holiday shopping growth trend of low double digits.
- Stocks got off to a slower start to the week, driven by worries of a covid surge in China and weakness in Chinese stocks. The country reported 25,000 new covid cases to start the week and multiple deaths, the first since May. As a result, the government implemented new restrictions, including on public gatherings, online schooling, closing shopping malls/restaurants. The increase in case counts is being seen in some of the largest cities now as well including Beijing and Shanghai which is more concerning for China and its zero covid policy. It was just the prior week China announced several easing restrictions on its zero covid policy including cutting the time travelers/people in contact with a positive case are required to quarantine and looking to end city-wide mass testing.
- Crude oil fell as much as 6% Monday after a WSJ report said Saudi Arabia and other oil producers are discussing increasing production up to 500k barrels/day for this Thursday’s OPEC meeting. Later that day, the Saudis denied the report adding that the group was ready to reduce production further if necessary, with UAE also denying such discussions, leading to a recovery in oil.
- Recent Fed speak:
- The FOMC meeting minutes from the November 1-2 meeting gave no surprises, with policymakers debating the Fed’s next steps including a step back in the pace of rate increases that would be appropriate for the Fed to assess the cumulative impacts of tightening so far. There were additional comments that the risk to inflation remains to the upside, but the good news was inflation expectations remain anchored. Some said the terminal rate may be higher than previously thought.
- San Francisco Fed President Mary Daly said at an event that when assessing policy right now the Fed has to be mindful of three things: cumulative tightening (both rate hikes here and abroad along with the balance sheet runoff), lags in monetary policy, and the evolution of data. Regarding the cumulative tightening, one of the Fed’s models uses a proxy funds rate that takes cumulative policy moves into effect and that rate is currently 6% compared to the fed funds rate of 3.85%.
- Cleveland Fed President Loretta Mester gave support for a slower pace of rate increases, but reiterated the Fed needs to see more progress on inflation before it is comfortable ending the rate hike cycle.
- Last week, the Department of Education announced an extension of the pause on student loan repayments and interest. The extension came after Biden’s plan to cancel student loan debt was blocked by lower court orders. The announcement says the repayments will begin 60 days after the courts make a decision, or June 30, 2023 if it has not been resolved by then. The Biden Administration and the Department of Justice requested the Supreme Court to lift the lower court’s decision, which will likely lead to the Supreme Court deciding the case, something that will likely not happen for several months.
Did You Know…?
“The Day of Eight Billion”
The world population is estimated to have reached 8 billion people as of November 15, 2022, according to models of the United Nations. It took just 12 years to go from 7 billion to 8 billion and was less than a century ago that the world population was just 2 billion. Driving the fast growth has been advances in public health and medicine, along with higher fertility rates (the number of children per woman) in lower-income countries. Although there has been a rapid growth in the human population, the growth rate has been slowing. In fact, it is projected that in a couple decades the human population will begin to shrink. In the UN’s population update released over summer, it is projected the world population will be 10.4 billion by 2100, down from 11 billion in the prior projections, but the diversion in models is becoming wider as there are larger differences between assumed fertility rates.
The Week Ahead
Investors will be anticipating numbers on Black Friday and Cyber Monday shopping this week as that is typically seen as a proxy for holiday shopping and the health of the consumer. This week will include several notable earnings reports along with a wave of economic data reports as a new month rolls over. The highlight on the economic calendar is Friday’s employment report. Economists are expecting around 220,000 new jobs were added in the month of November. The other highlight will likely be the Bureau of Economic Analysis’ personal income and outlays report which will include the Fed’s preferred measure of inflation – the personal consumption expenditure price index, where the expectation is for a 0.4% increase in October. Updates on the employment market will also come from the ADP Employment report and job openings on Tuesday, along with unemployment claims on Thursday. Other notable economic releases include the Case-Shiller home price index and consumer confidence on Tuesday, the second revision of third quarter GDP and pending home sales on Wednesday, and October construction spending and the PMI and ISM manufacturing survey indices on Thursday. Quarterly earnings reports are expected from Intuit, Hewlett Packard Enterprise, CrowdStrike on Tuesday, Salesforce, Snowflake, Synopsys on Wednesday, and Dollar General, Ulta Beauty and Kroger on Thursday. Lastly, there will be several Fed officials making public appearances, including a speech from Chairman Powell Wednesday afternoon before the Fed goes into a quiet period prior to its December 14-15 FOMC meeting.