Over the past few weeks, the macro environment has generally become “less bad” and that does justify some kind of a rally, but it’s important not to confuse “less bad” conditions with actual “good” ones. It’s also important not to mis-interpret year-end seasonal factors and positioning, combined with a sudden burst of optimism, with the implication that this has sown the seeds for a sustainable rally and an end to all this volatility. We saw in full technicolor (mostly red) last week that it has not. Not yet.
When the day finally arrives when the Fed stops hiking rates, that’ll doubtless be one big negative out of the way. But the question will then become; “just how bad is the economy?” And the answer could well be along the lines of; “pretty damn bad”.
Even if the Fed stops hiking interest rates after the December or February meeting (far from a sure thing), economic growth will likely continue to roll over and corporate earnings will remain under pressure. A stagnant economy and falling earnings do not create a good environment for stocks.
In that scenario, earnings are likely to be depressed until the Fed finally pivots and starts cutting rates again to stimulate the economy in an environment where it feels inflation is at least mostly under control. Mid 2023? End of 2023? 2024? Who knows?
I’m not trying be a complete Debbie Downer here. Some good things are happening and there’s been a tangible improvement in market conditions in recent weeks - but this stuff had been aggressively priced in to stock prices already and we got an acute reminder last week that there are still plenty of major obstacles for risk assets including still-rising interest rates, slowing growth, still-high inflation and falling earnings, not to mention China COVID, the supply chain, Ukraine and the cremation of crypto.
The problem is that there's still enough good news to eventually mean more bad news. The current Catch-22 for stocks is that if the economy is too strong, it means more inflation and more Fed tightening, thereby hurting stock valuations. If the economy is too weak, it can mean lower earnings, thereby hurting stock valuations. Ending up on that narrow strip of middle ground is going to be very tricky.
The skies have most certainly not cleared yet.
Much of last week was spent playing a waiting game before next week’s avalanche of critical data (see THIS WEEK’S UPCOMING CALENDAR, below) and, as has been the case lately, when the market is awaiting something to give it a renewed sense of direction, it tends to just sink steadily lower while it waits.
US equities tumbled early in the week as a better-than-expected report on the state of the services sector raised more “good news is bad news” concerns that the strong economy will prompt the Fed to keep increasing interest rates to bring down inflation. Market interest rates jumped, tech stocks got pounded again, bond prices fell and the so-called “fear index”, the VIX (see LAST WEEK BY THE NUMBERS below) spiked 8% in a day.
There was also a consistent drumbeat of caution from major bank CEOs last week, including those of Bank of America, Goldman Sachs, Morgan Stanley and others at the Goldman Sachs Financial Services Conference, throwing micro-economic fuel onto what had previously been a mostly macro-economic-driven fire.
We learned that the rate of wholesale inflation of raw materials is broadly heading in the right direction, if a little more slowly than the Fed would ideally like. Data released last week showed the Producer Price Index (PPI) rose 0.3% in November, a little higher than expected but no higher than the month before and was up 7.4% from a year ago, easing from 8.1% year-on-year in October. Core PPI, which excludes volatile food and energy prices, also climbed 0.3% and was up 4.9% year-on-year, down from a rate of 5.4% the month before.
The market is very much on edge ahead of next week’s Consumer Price Index (CPI) retail inflation report on Tuesday morning. Any indication that prices remain elevated and that inflation is proving to be more sticky than the recent narrative has led us to believe could be very damaging.
This market narrative, that the Fed seems to have finally broken the back of inflation, had been the dominant one for the last few weeks but doubts certainly began to creep in last week and if this is just the latest example of an Emperor with no clothes like all the other false starts of 2022, things could get ugly.
The very next day comes the announcement of the Fed’s final interest rate hike of 2022, with a half a percent increase all but certain, but with the tone and nuance of Chair Jay Powell’s ensuing news conference likely to prove critical to the market’s reaction. And then the day after that, we will hear from the European Central Bank (ECB) on what they are doing with interest rates over there.
Strap in, this could be a frenzied week one way or the other.
As I constantly have to do every few weeks, I do want to emphasize that for investors with significant time horizons (15/20 years +), we are experiencing what could be a once every 10-20 years buying opportunity, regardless of any gloomy stuff you may be hearing or reading (including in this very weekly review sometimes) regarding the medium term outlook for stocks.
As I have said before, real-time market declines are always painful and possible future declines always seem scary to contemplate. But past declines never fail to look like (often missed) golden buying opportunities. And what we are going through right now will one day be a past decline. We don’t know exactly when this will be, but we do know that many people will one day look back on now and wish that they had taken greater advantage of the prevailing circumstances.
OTHER NEWS
Recession right now? I don’t think so .. I referred to “recession truthers” in last week’s report who are absolutely desperate to tell us how we are already experiencing a recession as we speak and it was another bad week for their highly flawed case. In the context of an economy that’s adding a quarter of a million jobs or more every month, we learned that over a third of the jobs which have been lost this year have been in the tech and media/communication services sectors which only employ about 3-4% of the national workforce (but which get all the self-pitying air-time in the media).
The American consumer is still spending like crazy, as evidenced by monster Black Friday spending data and we will learn more about this when the monthly retail sales number comes out this week.
None of this is remotely close to recessionary and nor is the fact that one of the most reliable signs of the arrival of an actual recession, the credit card 30-day delinquency rate, remains at barely above 2%. It’s at its lowest levels since 50 Cent was spending his time in da club in 2003 and got to close to 7% during the last proper recession in 2008.
All of which is not to say that we can’t move into a recession in 2023 or 2024 as all this data could well deteriorate quickly, just that we are not there yet.
China’s Zero-COVID policy over? .. China is lifting its most severe COVID restriction policies following an outbreak of protests against the strict controls. Lockdowns would continue but should now only apply to more targeted areas - for example, certain buildings, units or floors as opposed to whole neighborhoods or cities being shut down. Areas identified as high-risk could come out of lockdown after five days if no new cases are found. Several cities in China have endured months-long lockdowns even with only a handful of cases having been found.
People with COVID can now isolate at home rather than in state facilities if they have mild or no symptoms. They also no longer need to show tests for most venues and can travel more freely inside the country. Schools can remain open with student attendance if there's no wider campus outbreak.
The general sense is that this is all considered likely to help propel a rebound in the Chinese economy and could also help to ease pressure on global supply chains. But the Chinese battle with the virus may be only just beginning.
The Zero COVID policy has hindered and delayed the country’s fight against community infection up till now. Vaccines and boosters are of inferior quality to those in the West and fewer than half of over-eighties have been boosted with them anyhow. 1.4 billion Chinese have next to no natural immunity and, worryingly, there are only 3.6 ICU beds per 100,000 people in China, compared to the US’s 34.7.
Another bad week for Zuck .. European Union (EU) privacy regulators have ruled that Meta/Facebook (META) cannot require users to agree to personalized ads based on their online activity, a ruling that could hit the company hard, limiting the data that Meta/Facebook can access to sell such ads to third parties. The ruling on Monday approved a series of decisions which determined that EU privacy law prohibits the company’s practice and that of its platforms, such as Instagram and Facebook, of using their terms of service as a justification for allowing such advertising.
Meta/Facebook was also forced last week into threatening to remove news from its platforms if the US Congress passes a proposal aimed at making it easier for news organizations to negotiate collectively with individual companies like Google and Facebook. Lawmakers are considering adding the proposal to the Journalism Competition and Preservation Act as a way to help the struggling local news industry.
Many recently-fired Meta/Facebook employees (the company shed 11,000 jobs last month) are claiming that they are only being paid a part of their promised severance payments and that the company is ghosting them when they attempt to reach out for an explanation.
UNDER THE HOOD:
Lowry’s Selling Pressure crossed back into the dominant position above the Buying Power on Monday as the momentum of Demand is clearly waning and buyers look exhausted. This is in stark contrast to the exhaustion of sellers, which is generally a necessary prerequisite for a sustainable turnaround in the market’s fortunes and, frankly, seems like a bit of a distant hope at the moment as the latest bear market rally appears to now be running on fumes.
Medium to longer term technical indicators never really got out of second gear during the latest rally, staying stubbornly supportive of the bear case. But now even the shorter term readings, which had turned hopefully positive for a while, have fallen back in line and all time frames are now confirming a negative technical outlook.
It is interesting to note, however, that we are now experiencing a very similar technical set-up to that of exactly four years ago, in early December 2018, which investors may remember led to the start of what was a final sharp, brutal move lower in the major price indexes going into the Christmas holiday, which finally completely exhausted Supply before strong Demand then crashed the bears’ party to turn things around dramatically in the very last days of the year and into early 2019.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
It will be a decisive week for investors, with the release of the November US inflation data, interest rate decisions on both sides of the Atlantic and the latest US retail sales number, all of which could well determine how stocks perform for at least the rest of the year.
Pre-market on Tuesday morning, the US Bureau of Labor Statistics will report the November Consumer Price Index (CPI) measure of retail inflation. The headline index is expected to be up by 7.3% year-on-year, compared with a 7.7% rate in October. The Core rate, which excludes food and energy components, is forecast to be up 6.1%, versus 6.3% last month.
Then on Wednesday afternoon, the Federal Reserve’s Open Market Committee (FOMC) will conclude its two-day meeting with an announcement of the latest interest rate adjustment, forward guidance (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) and a press conference from Chair Jerome Powell. The whole jamboree will begin around 2pm ET (directly clashing with the kick-off time for the second World Cup semi final, ugh!). The strong expectation is for a further increase of 0.50% in the Fed Funds interest rate to a target range of 4.25% to 4.50%, following four-straight 0.75% hikes at the most recent meetings.
Other economic data out next week includes the important Retail Sales data announcement for November on Thursday.
Across the water, the European Central Bank will announce its latest monetary policy decision as well and is also expected to raise interest rates by half a percent.
A relatively light earnings docket this week includes announcements from Oracle, Adobe, Accenture, Lennar and Darden Restaurants.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 25% (unchanged from 25% the previous week)
→Neutral: 33% (down from 35% the previous week)
↓Bearish: 42% (up from 40% the previous week)
Net Bull-Bear spread .. ↓Bearish by 17 (Bearish by 15 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the Great Financial Crisis. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987.
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Utilities (two biggest holdings: NextEra Energy, Duke Energy) - down 0.75% for the week
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) for the second week in a row - down 8.4% for the week
- The S&P 500 and the NASDAQ-100 performed pretty much equally poorly
- US Markets were bottom of the pile with Emerging Markets doing the least badly ahead of International Developed Markets
- Small Caps underperformed Mid Caps, with Large Caps doing least badly
- Growth stocks were beaten up much worse than Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 151 and fell by by 13 points last week and that of US Market Selling Pressure is now at 165 and rose by 9 points over the course of the week.
- SPY, the S&P 500 ETF, remains just above its 50-day and 90-day moving averages but has now fallen back below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 50**. SPY ended the week 17.7% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, fell back below its 50-day and 90-day moving averages. It remains well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 49**. QQQ ended the week 30.1% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility (often referred to as the “fear index”) implied by S&P 500 index option trading ended the week higher at 22.8. It remains below its 50-day and 90-day moving averages. It also remains well below its long term trend line.
ARTICLE OF THE WEEK: It’s the question everyone is asking; How TF is FTX founder and fraudster Sam Bankman-Fried not in jail yet? Slate dives into it.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
Forward guidance refers to the communication from a central bank about the state of the economy and the likely future course of monetary policy. It is the verbal assurance from a country's central bank to the public about its intended monetary policy.
Forward guidance attempts to influence the financial decisions of households, businesses, and investors by providing a guidepost for the expected path of interest rates. The central bank's clear messages to the public are one tool for preventing surprises that might disrupt the markets and cause significant fluctuations in asset prices.
Forward guidance is a key tool of the Federal Reserve (Fed) in the United States.1 Other central banks, such as the Bank of England (BOE), the European Central Bank (ECB), and the Bank of Japan (BOJ), use it as well.
Forward guidance consists of telling the public not only what the central bank intends to do but what conditions will cause it to stay the course and what conditions will cause it to change its approach.
For example, in early 2014, the Fed's Federal Open Market Committee (FOMC) said it would continue to keep the federal funds rate at the lower bound at least until the unemployment rate fell to 6.5% and inflation increased to 2% annually. It also said that reaching these conditions would not automatically lead to an adjustment in Fed policy.
With some sense of where the economy might be headed, individuals, businesses, and investors can have greater confidence in their spending and investing decisions. Also, forward guidance can help the financial markets function more smoothly. For example, if the FOMC indicates it expects to raise the federal funds rate in six months, potential home buyers might want to get mortgages ahead of a potential increase in mortgage rates.
During the FOMC meeting on March 15-16, 2022, the Fed increased interest rates in an effort to combat rising inflation. The Fed's target range was increased by 0.25% for the first time since 2018, going from 0% to 0.25% to 0.25% to 0.50%.
In the US, the Fed's FOMC has used forward guidance as one of its major tools since the Great Recession.
Through the use of forward guidance, the FOMC has communicated its intent to keep interest rates low for as long as needed to improve credit availability and stimulate the economy. Similarly, Fed Chair Jerome Powell communicated to the financial markets that the Fed would continue to support the U.S. economy until the effects of the global financial crisis have subsided.
Almost all recent Fed chairs, including Ben Bernanke, Janet Yellen and now Jerome Powell have been strong proponents of forward guidance. However, before the long tenure of Alan Greenspan, the Fed was far more reticent about telegraphing its intentions into the market.
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