Market Update December 12, 2022

Photo by Rachel Reinhardt on Unsplash

Economic data for the week included an unexpected gain in ISM services/non-manufacturing, higher-than-expected producer prices, and an improvement in consumer sentiment.

Global equity markets fell back last week, along with higher interest rates; however, Chinese stocks gained with new government measures designed to reopen the economy. Bonds fell back due to rising yields. Commodities were led lower by a sharp drop in crude oil prices.

U.S. stocks pulled back last week, in a reversal of sentiment from the prior few weeks. Technically, the S&P 500 has met resistance several times at the point of the 200-day moving average, which is now around 4037. (Stocks rising above the 200-day has been considered a ‘buy’ signal by some investors, so trading around that level tends to be closely watched for changes in sentiment.) Every sector lost ground last week, with defensive utilities, health care, and consumer staples suffering minimal declines, while energy fell by over -8%, in keeping with a sharp oil price decline. Several financial executives also provided negative economic outlooks for upcoming quarters.

The U.S. Federal Trade Commission has blocked Microsoft’s acquisition of Activision Blizzard, citing anti-competitive concerns in the video gaming segment, now requiring a higher legal threshold to potentially determine the outcome in court. Tech has been under greater scrutiny from both sides of the political aisle, due to high oligopolistic power with pricing, as well as unresolved data capture and privacy considerations. This is another issue that is likely to continue into 2023.

The Georgia runoff election resulted in a victory for the Democrats, giving them 51-49 control in the Senate. While they already had effective voting control at 50-50, due to the tie-breaking ability of the Vice President, a clear majority offers nuanced benefits, such as stronger control over committees and the clear ability to issue subpoenas. The latter may have an effect on sectors under greater governmental scrutiny, such as technology. However, with Republican control of the House, the ability to pass more controversial or extreme legislation on either side appears limited over the next two years (a status quo financial markets have valued highly). Later in the week, Sen. Sinema (D-AZ) announced intentions to leave the Democratic party and become an independent. Ramifications for the tight, and now tighter, Senate power balance remain unclear.

Real estate also acted more defensively as one of the week’s leaders. Increased pressure has been seen in the real estate sector, with cap rates falling back, due to lower net income, as well as rising financing costs. Accordingly, transaction volume in the private market appears to have fallen back, with buyers waiting for better clarity on 2023 rate conditions and a hoped-for pause in the upward path, and sellers not interested in accepting discounted prices. Unsurprisingly, the least amount of clarity rests in the hard-hit retail and office markets. In fact, several private real estate funds have limited investor redemptions due to this liquidity crunch.

Foreign stocks performed largely in line with each other last week, and outperformed U.S. names, despite a rise in the value of the U.S. dollar—normally a headwind. European economic data remains on the cusp of recession, but not completely negative yet. It may be of some surprise, but as of Friday, the MSCI EAFE index has again risen ahead of the S&P 500 in terms of year-to-date performance. In emerging markets, Chinese stocks emerged as one of the sole areas with a gain of several percent. The Chinese government unveiled a policy titled ‘10 measures’ last week, outlining their loosening of tight Covid policies and eventual moving away from a zero-tolerance approach. This was likely for pragmatic reasons, but also to alleviate public dissatisfaction, which is at about the highest level in decades. Although not expected to be a fast process, it does start to remove the probabilities of harsh shutdowns, which have weighed on financial markets continuously during the pandemic and afterward.

U.S. bonds fell back last week as interest rates ticked higher across the yield curve, in keeping with economic reports that were assumed to keep the Fed hawkish next week, at least in tone. Treasuries fared slightly better than corporates, although differences were minimal. Foreign bonds fared a bit worse, held down by a rally in the dollar.

Commodities experienced a negative week, as a sharp decline in energy prices offset minor gains in metals. The price of crude oil fell over -11% to $71/barrel. As has been case as of late, sentiment has turned sour due to worries over a global economic slowdown negatively holding back demand, outweighing most other factors. Separately, crude oil from Russia came under a starting price cap of $60/barrel starting on Monday (and adjustable to 5% under the market rate to be revised every two months), as the West attempts to minimize their oil revenue via a level closer to the cost of production. Unfortunately, the sanctions and perhaps the price cap as well, have been or could be somewhat ineffective as a political punishment. While world market prices have reacted to these announcements, the non-transparent nature of physical crude oil trading lends itself to gaps for a good deal of Russian oil to be released to market.

Period ending 12/9/20221 Week (%)YTD (%)DJIA-2.74-5.95S&P 500-3.35-16.17NASDAQ-3.98-29.10Russell 2000-5.06-18.94MSCI-EAFE-0.20-12.96MSCI-EM0.48-18.43Bloomberg U.S. Aggregate-0.44-11.84

U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.12/31/20210.060.731.261.521.9012/2/20224.344.283.673.513.5612/9/20224.314.333.753.573.56

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.