ND&S Weekly Commentary 12.05.22 – Markets Hearing What They Want to Hear

Global equities had a sharp positive response to Fed Chairman Jerome Powell’s mid-week comments, but then began backsliding as data that supports a continuation of a strong US labor market and that showed wage inflation above expectations was released. Powell had a mostly hawkish tilt to his message, but equity investors seized on hints that the Fed is likely slowing its pace of interest rate increases – information that was supposedly already discounted in stock prices.

For the week, the DJIA managed a gain of 0.41% while the S&P 500 added 1.19%. The tech-heavy Nasdaq advanced 2.12%. International markets were higher with the MSCI EAFE Index (developed countries) gaining 1.06% and emerging market equities (MSCI EM) jumping 3.51%. Small company stocks, represented by the Russell 2000, grew 1.33% last week. Fixed income, represented by the Bloomberg Aggregate, gained 1.54% for the week as yields generally moved lower, with the front of the curve being more stubborn and the ending result being more yield inversion from 1yr to 10yr. The 10 YR US Treasury was down 17 basis points on the week closing at a yield of 3.51%. Gold prices closed at $1,785/oz. – up 1.83%. Oil prices reversed a five-week trend and closed up ~4.9% at $79.98 on the week.

In last week’s data, housing showed some improvement over October but was still generally negative: the S&P Case-Schiller US Home Price Index was -8.7% vs -10.4% in October, the FHFA US home Price Index was 0.9% vs -7.5% in October, and the Pending Home Sales Index was -4.6% vs -8.7% in October. Real GDP was revised to 2.9% vs 2.6% and Consumer Confidence was unchanged at 100.2, and Consumer Spending was up 0.5% vs 0.3%.

This week’s economic data releases include Trade Deficit, Productivity revision, and PPI. It is a relatively quiet week. The following week is a very important one as the Consumer Price Index (CPI) data will be released, followed by the Fed Funds target rate announcement and then a press conference with Fed Chairman Powell.

There is more chatter about a “soft landing” but most money is betting against it. If you are looking for a reason why not a soft landing – look no further than it has never been done before… especially coming from where we were. We had a HUGE spike in the money supply and the CPI rocketed to near 10%. The Fed was slow to respond and now it is in a battle to land the economy in the goldilocks zone of ~2% inflation and ~4% unemployment. Imagine the space shuttle crew trying to land while blindfolded and the feedback from the ground is delayed 30 seconds. The chances they find the runway are slim. It will land, and there will be damage, but it will be temporary, and the shuttle/economy will fly again.

We hope that all of you and your families are continuing to stay healthy and safe this holiday season. There are only 13 days until Hanukkah and 20 days to Christmas and just 26 days left in 2022!

“Anyone who sits on top of the largest hydrogen-oxygen fueled system in the world, knowing they’re going to light the bottom, and doesn’t get a little worried, does not fully understand the situation.”
– John Young, Space Shuttle Astronaut