Market Update December 5, 2022

Photo by Anne Nygård on Unsplash

Economic data for the week included an upward revision to Q3 U.S. GDP, higher personal income/spending, as well as a positive surprise from the November employment situation report. These were offset by a decline of ISM manufacturing into contraction, lower home prices, and weaker consumer sentiment.

Global stock markets fared positively last week, with foreign outperforming domestic. Bond prices also rose as yields across all maturities fell back; foreign bonds were also aided by a weaker dollar. Commodities gained, due to a rise in prices for industrial metals and crude oil.

U.S. stocks gained ground on net last week, with ‘growth’ sectors communications and consumer discretionary leading the way with sizable gains of 2-3% each, while energy lagged, down -2%.

Indexes began the week on a sour note, with rising Covid cases and protests in China that raised uncertainty and weighed on investor sentiment generally; however, soothing comments from government officials alluded to an upcoming evolution in lockdown policy. By mid-week, strong Congressional support for the Railway Labor Act looked to head off a potential strike by railroad workers—a bill that would require companies and unions to accept labor agreements even if rejected by members, as well as other measures to avoid disruptions for that economically-critical sector. (The last government action to settle railroad labor issues was in 1992, so there has been a precedent.)

Stocks were helped mid-week as well with indications from Fed Chair Jerome Powell that the December rate hike will most likely be at a ‘moderate pace’ of 0.50%, reassuring investors, despite an otherwise hawkish tone that still alluded to a terminal rate near 5%. Additionally, the S&P 500 value rising above its 200-day moving average level has tended to draw attention from a technical standpoint as a ‘bullish’ signal, although these can be imprecise around turning points. By Friday, a strong employment situation report brought back the ‘good news is bad news theme’, as the hoped-for weakening needed for the Fed to reassess rate policy didn’t occur.

From a valuation perspective, according to FactSet, the S&P (at 4,050 or so) is trading at roughly a 17.6x forward P/E, based on 2023 earnings. This reflects 70% of firms reporting positive surprises for Q3, at a blended growth rate of 2.5%—the headline figure remains heavily skewed by energy earnings growth of over 130%, while half of index sectors show declines. The pattern is expected to steadily erode away in Q4, with a total market earnings decline of -2% to -3% expected. For 2023, earnings growth expectations have fallen from around 8% to 5-6%.

Foreign stocks in developed Europe and the U.K. slightly outperformed those in the U.S., due to beneficial currency movements. Japanese stocks were flat, while emerging markets were led by Chinese stocks up 5-10% on the week. The latter was due to hopes for easing of lockdown policies noted earlier, with government hints of easing and a relaxation of quarantine requirements. In recent weeks, protests against the zero-Covid policy had been escalating—large demonstrations of any kind have remained relatively rare, making these events quite unusual. The underlying problem remains a growing discontent from a restless younger population versus the government recognition that vaccination rates for older citizens remain well below those of other countries, which has kept mortality risk/benefit at still-unacceptable levels. While it’s assumed a loosening of extreme policies may occur in the spring, there is no fast solution for the vaccination problem, especially with far poorer domestic vaccine efficacy compared to therapies developed in the U.S. and Europe.

U.S. bonds gained as interest rates fell back across the entirely of the treasury yield curve, along with comments from Chair Powell perceived as dovish; investment-grade corporates slightly outgained treasuries. Foreign bonds followed the same direction, but to an even greater degree due to the U.S. dollar falling back by over a percent on the week, leading to a positive currency push. The U.S. treasury yield curve remains sharply inverted (-0.83% for the 10y-3m and -0.77% for 10y-2y)—still the most so since 1980-81, a period where the 10y-2y reached several troughs of -1.5% to -2.0%. Despite its simplicity, and calls that ‘this time is different’, this has remained one of the more effective indicators of recession risk.

Commodities were mixed, but were helped a bit by the weaker dollar. Industrial metals gained sharply, in nickel, copper, and aluminum markets, followed by a more tempered rise in precious metals. Industrial metals gains were correlated to higher hopes for a China reopening, which is expected to unleash more predictable manufacturing activity. The price of crude oil gained nearly 5% to just under $80/barrel, with some uncertainty over the upcoming weekend’s OPEC+ meeting (where production quotas were left unchanged on Sunday), and the wildcard of a price cap on Russian oil set to be imposed. Oil prices have fallen back significantly from highs around $93 just a few weeks ago, with continued concerns over global recession and weakened demand outweighing prior fears over lack of supply (from uncertain workarounds to Russian sources). Natural gas prices, driven largely this time of year by expected weather, fell back by nearly -15%, as U.S. forecasts turned warmer for the end of the year.

Period ending 12/2/20221 Week (%)YTD (%)DJIA0.41-3.30S&P 5001.19-13.26NASDAQ2.12-26.17Russell 20001.33-14.62MSCI-EAFE1.05-12.78MSCI-EM3.51-18.82Bloomberg U.S. Aggregate1.54-11.44

U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.12/31/20210.060.731.261.521.9011/25/20224.414.423.853.683.7412/2/20224.344.283.673.513.56

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.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.