Investors are trying to read the tea leaves in a choppy US stock market to gauge whether the recent uptrend can continue after Federal Reserve Chair Jerome Powell unleashed bullish sentiment in late November by suggesting that its aggressive rate hikes could slow down.
“The leadership of the stock market is telling you that the economy is not going to collapse under the weight of the Fed in the near term,” Andrew Slimmon, senior equities portfolio manager at Morgan Stanley Investment Management, said in a phone interview. “I think you will get a strong market by the end of the year.”
Noting the outperformance of cyclical market sectors, including financials, industrials and materials, over the past few months, Slimmon said those sectors would “roll over” if the economy and corporate earnings were on the brink of collapse.
The US added a robust 263,000 new jobs in November, beating the forecast of 200,000 by economists polled by the Wall Street Journal. The unemployment rate was unchanged at 3.7%, the US Bureau of Labor Statistics reported on Friday. That’s almost half a century low. Meanwhile, hourly wages rose 0.6% last month to an average of $32.82, the report shows.
The “resilience” of the labor market and the “rebound in wage pressures” won’t stop the Fed from slowing the pace of rate hikes this month, Capital Economics said in an email on Friday. Capital Economics said it still expects the central bank to reduce the size of its next rate hike to 50 basis points in December, after a string of 75 basis point hikes.
“Broadly speaking, a strong job market is good for the economy and bad for the Fed’s mission to curb inflation,” said Louis Navellier, Navellier’s chief investment officer, in a statement on Friday.
The Fed raised its benchmark interest rate to rein in high inflation, which showed signs of slowing in October based on CPI data. Next week investors will get a reading of wholesale inflation for November as measured by the PPI. The PPI data will be released on December 9th.
“That’s going to be an important number,” Slimmon said.
According to Jeffrey Kleintop, Charles Schwab’s chief global investment strategist, the producer price index is much more driven by supply issues than consumer demand.
“I think the PPI pressure has peaked because of the drop that we’ve seen in supply chain issues,” Kleintop said in a phone interview. He said he expects the upcoming PPI pressure could reinforce the overall message that central banks are slowing the pace of rate hikes.
In the coming week, investors will also closely monitor initial jobless claims due Dec. 8 as a leading indicator of the health of the job market.
“We’re not over the hill yet,” Morgan Stanley’s Slimmon warned. While he is bullish on the stock market near-term, partly because of “a lot of money on the sidelines” that could fuel a rally, he cited the Treasury market’s inverted yield curve as a cause for concern.
Inversions, when shorter-term Treasury yields rise above longer-term rates, have historically preceded recessions.
“Yield curves are great predictors of economic slowdowns, but they’re not very good predictors of when it will happen,” Slimmon said. His “suspicion” is that a recession could come after the first half of 2023.
“Massive technical recovery”
Meanwhile, the S&P 500 index closed slightly lower at 4,071.70 on Friday but still posted a 1.1% weekly gain after rising on November 30 on Powell’s remarks at the Brookings Institution suggesting that the Fed reviewed the magnitude of its rate hikes at its 12th 13-14 policy meeting.
“The bears vilified” the rally Powell fueled, saying his speech was “hawkish and does not justify the market’s bullishness,” Yardeni Research said in a note emailed Dec. 1. But “we think the bulls are getting that inflation right, peaking this summer and were relieved when Powell said the Fed might be ready to ease inflation without pushing the economy into recession.”
While this year’s inflationary crisis has caused investors to “only focus on threats and not opportunities,” Powell is signaling it’s time to look at the latter, according to Tom Lee, head of research at Fundstrat Global Advisors, in a note on Friday morning. Lee was bullish even before Powell’s Brookings speech, describing 11 headwinds of 2022 that were “flipped” in a Nov. 28 note.
See: The stock market could see “fireworks” by the end of the year as headwinds have “turned around,” says Fundstrat’s Tom Lee
The S&P 500 has struggled back above its 200-day moving average, Lee highlighted in his note Friday before the market opened. He referred to the second straight day the index closed above this moving average as a “massive technical recovery” and wrote that “in the ‘crisis’ of 2022 this didn’t happen (see below) so this is a.” pattern break. ”
FUNDSTRAT GLOBAL ADVISORS NOTES FROM THE MORNING OF DEC. 2, 2022
On Friday, the S&P 500 SPX closed -0.12% again above its 200-day moving average, which was 4,046 at the time, according to FactSet data.
Navellier said in a note on Friday that the 200-day moving average was “important” to watch on the day as questions about whether the U.S. stock market benchmark closed above or below “lead to further momentum in both directions.” could”.
But Charles Schwab’s Kleintop says he could “put a little less emphasis on technicals” in a market that’s currently more macro-driven. “If a simple word from Powell could push the S&P 500 above or below the 200-day moving average,” he said, “it might not be so dependent on supply or demand for stocks by individual investors.”
Kleintop said he was eyeing a risk to the stock market next week: a price cap on Russian oil that could come into effect as early as Monday. He worries about how Russia might react to such a cap. If the country withholds oil from the global market, it could cause “oil prices to surge again CL.1, +0.45%” and increase inflationary pressures.
Read: The G-7 and Australia join the EU in imposing a $60 per barrel price cap on Russian oil
Navellier, who said a “soft landing is still possible” if inflation falls faster than expected, also expressed concerns about energy prices in his note. “One thing that could reignite inflation would be an increase in energy prices, which is best hedged by overexposure to energy stocks,” he wrote.
“Volatility is likely to remain elevated,” said Navellier, citing “the Fed’s determination to continue to apply the brakes.”
U.S. stocks have had some big swings lately, with the S&P 500 up more than 5% over the past month after rising 8% in October and down more than 9% in September, according to FactSet data demonstrate. Major benchmarks ended Friday mixed, but the S&P 500, Dow Jones Industrial Average DJIA, -0.10%, and the tech-heavy Nasdaq Composite COMP, -0.18%, each rose for the second straight week.
“Keep the bias towards quality earners,” Navellier said, “take advantage to add pullbacks.”