Weekly Update

Investors Love Powell’s Softer Tone

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Published December 2, 2022

Investors increasingly believe the Federal Reserve has seen peak inflation and, recession or no, will very soon pause their interest rate hikes. Stock markets are responding as if the market has bottomed; with the question now how slow 2023 global economies will be. While employment layoffs are regularly in the news, labor markets remain strong with metrics of consumer activity holding at high levels. At worst, the economic data has become mixed, compelling investors to shift away from the hand-wringing that characterized the late Summer/early Fall. China appears to have pulled back on the most restrictive Covid measures. Supply chain issues have all but disappeared. The FTX crypto implosion looks to be limited to the landscape of crypto companies and investors, not spreading outward to threaten any systemic trouble. Investors now seem to look forward to a 2023 without the storm clouds they once feared.

Nevertheless, the stock market has merely rebounded back to its trendline, which remains sloping downward in bear market fashion. Will this visit to the trendline provide a different result – a sustained break upward?

Back to the bearish trendline

As has been the case all year, the answer lies in how the U.S. Dollar performs. The Dollar has retreated to its long-term trendline. We would expect a bounce here. Will that mean a corresponding dip in stock prices?

Dollar has retreated to its long-term trendline

The market has clearly shifted regardless, as the Dow Industrials are now FLAT over a one-year period, an unthinkable proposition a few months ago.

Look at the Dow Industrials trying to scratch back to green for 2022…

Dow Industrials trying to scratch back to green for 2022

The Industrial sector is a big reason for some of the broader indexes recouping gains in the last month…

Industrial sector influence

And this rise in the Industrials reflects money rotating OUT of the tech/consumer darlings of the past decade – a healthy development.

We will see if investors can build on their recent enthusiasm and continue the long trend of post-midterm election market wins.

Market Update

Stocks fell Monday on concerns about Chinese Covid lockdowns and related protests with the losses accelerating in the afternoon on comments from Fed officials. Those comments fueled fears that the Fed might not be ready to ease back on interest rate hikes. The concerns sent stocks lower by -1.5%. A further -0.2% dip Tuesday ahead of a speech by Fed Chair Powell and the monthly jobs report to be released Friday. The Wednesday speech produced fireworks as the Fed Chairman encouraged investors that a “soft” economic landing was possible and rate hikes might slow down. Stocks soared with the S&P 500 rising +3.1%. But there was no follow-through in Thursday’s session as stocks ran in place even though a report on inflation supported the narrative of slowing price rises. Friday’s monthly jobs report showed a labor market that remains strong with wages rising, both conditions that undermine the arguments needed to lead the Fed to ease. Stocks opened down more than -1% lower with buyers stepping in to minimize the damage.

For the week the S&P 500 (SPY) held to a small +1.14% gain while the Nasdaq 100 (QQQ) added +1.96%. Smallcaps (IWM) found a +1.33% weekly lift.

Warm wishes and until next week.