Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. 🙂
Here is everything you need to know to get you ready for the trading week beginning December 5th, 2022.
Stocks cut much of their earlier losses Friday as investors looked past hotter-than-expected labor data to the upcoming Federal Reserve meeting.
The Dow Jones Industrial Average closed up just 34.87 points, or 0.1%, to 34,429.88 points after hitting a session low of more than 350 points down. The S&P 500 dipped 0.1% to 4,071.70, rebounding from an earlier loss of 1.2%. The Nasdaq Composite also made up ground to end nearly 0.2% lower at 11,461.50 points. The tech-heavy index dropped as much as 1.6% earlier in the day.
All three indexes set weekly gains, with the Nasdaq posting the largest increase at nearly 2.1%. The S&P 500 added 1.1%, and the Dow ticked up by 0.2%. Friday’s close marked the first time the three major indexes notched back-to-back weekly gains since October.
Stocks dipped after labor data released Friday morning showed payrolls rose by 263,000 in November, a bigger gain than the 200,000 increase expected by economists polled by Dow Jones. Average hourly earnings also came in above expectations, jumping 0.6% compared with the prior month and 5.1% against the same month a year ago. The unemployment rate held steady at 3.7%.
The market quelled much of those losses as the trading day went on. Market observers attributed the move to investors being increasingly able to shake off concerning individual economic indicators following remarks on Wednesday from Fed Chair Jerome Powell that appeared to confirm slowing rate hikes starting as early as December.
“Just one strong labor data point is not going to be enough after Powell’s speech,” said Anna Han, vice president at Wells Fargo Securities. “He’s confirming that we are seeing the trend that we are having an impact on inflation, so I think that sort of soothes the market and takes pressure off.”
It was the final monthly employment report before the Fed’s two-day meeting Dec. 13-14, in which the central bank is expected to slow to a 50 basis point interest rate hike from the 75 basis point hikes seen in recent months.
This past week saw the following moves in the S&P:
S&P Sectors for this past week:
Major Indices for this past week:
Major Futures Markets as of Friday’s close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday’s close:
Major Indices Rally Levels as of Friday’s close:
Most Anticipated Earnings Releases for this week:
(CLICK HERE FOR THE CHART!)
(T.B.A. THIS WEEKEND.)
Here are the upcoming IPO’s for this week:
Friday’s Stock Analyst Upgrades & Downgrades:
S&P Down Year-To-Date November Not So Bad for December
There was a stat floating around the internet and business news channels this week that stated when the S&P 500 was down 15% or more year-to-date (YTD) on November 30 December was down >2% on average. We ran the numbers yesterday before the big rally on Fed Chair Powell’s “makes sense to moderate the pace of our rate increases” comments yesterday at the Brookings Institute.
What we found was that most of the carnage after November YTD losses > 15% occurred in the Great Depression years and since WWII December has performed much better after a down >15% YTD November. During the Depression after these November YTD >15% losses December was down 3 of 4 with an average loss of -5.4%. In the six years since 1939 with these November YTD >15% losses December was up 3, down 3 with an average loss of -0.3%.
But with the big 3.1% gain in the S&P 500 on November 30, the YTD loss receded above the -15% mark to -14.4% on the heels of a 5.4% gain for the month, which is also a 14.1 percent rally off the October 12 low. And this marks the first back-to-back monthly gains of over 5% each month since August 2020, the ones before that were in March-May 2009. It’s the 14th such occurrence since 1950. The previous 13 all occurred in bull markets.
Now, when the S&P 500 is down YTD November less than 15%, December’s performance is not so bad at all, just a tad below the average 1.6% to 1.1%, up 17 of 23 or 74% of the time. We still expect some chop as the bull market finds its footing, but we remain bullish and anticipate the yearend rally to continue to climb the proverbial “wall of worry” and for the Santa Claus Rally to come to town.
Country ETFs Outperforming US Recently
For most major global equity markets, at some point this Fall a 52-week low has been put in place, with significant rallies since then. As shown below, of the 22 ETFs tracking key country stock markets in our Global Macro Dashboard, the average gain off the low is now 22%. The largest of these rallies have come from Germany (EWG), Italy (EWI), and China (MCHI), which have all risen over 30%. For China, that gain has come in the shortest span of time with October 31st being its low, whereas Italy and Germany’s lows were a few weeks further back. One other interesting note regarding China is currently it trades only slightly above its 50-DMA whereas a majority of other country ETFs are in or at least near overbought territory. On the other end of the spectrum, the US (SPY) has experienced the most modest rally having only risen 13.82%. India (INDA) is close behind with a 13.89% gain, although it bottomed before the rest of the world with its 52-week low being back on June 17th.
While much of the rest of the world has experienced a larger rebound off the lows, year to date performance between the US (SPY) and global equities excluding the US—proxied by the MSCI All World ex. US ETF (CWI)—is now very similar. The US is marginally in the lead with a -14.12% YTD total return versus a 14.45% drop for CWI. At the lows at the end of Q3, international markets were underperforming the US by more than 5 percentage points, but that gap has been closed during the current rally.
Five Good Signs for The Bulls In 2023
Can you believe it? We made it to December! As we noted yesterday, we wouldn’t be surprised if we finished this year with some more green, but today we’ll look into the future and what could be in store in 2023.
First things first, let’s start with something simple. Stocks will likely be lower this year; we can all agree there. How likely is the S&P 500 to be down two years in a row? The bottom line, it is pretty rare for back-to-back yearly losses, and we don’t expect it to happen this time either. In fact, over the past 50 years, it has only happened twice. There was a three-year losing streak after the tech bubble burst in 2000, 2001, and 2002, then back-to-back losses during the vicious recession of 1973 and 1974. So it ‘could’ happen, but we don’t see many similarities between now and those two times, suggesting next year should be a bounce-back year for stocks.
Another potential positive is that when the S&P 500 is lower during a midterm year (like we will likely see in 2022), the following year has been extremely strong. Since 1950, the year after a negative midterm year saw the S&P 500 higher all eight times, with a very impressive yearly return of 24.6%. Looking at the past 50 years, things are even better, as the ‘worst’ next year was 26.3%.
Thirdly, and somewhat similar to above, pre-election years historically are very strong for stocks, with the S&P 500 up 16.8% on average and higher 88.9% of the time. Midterm years are the worst, which clearly played out this year. All in all, that’s something for bulls to be excited about in 2023.
Fourth, we hear a lot about how a recession is coming in 2023, but we aren’t so sure. Sonu did a great job discussing some of this here and here.
The bottom line to us is that the consumer makes up 70% of the economy, and is still in good shape and spending. But could a recession start next year? Well, history would say it would be rare. That’s right, we found that out of the past 13 recessions, none started in a pre-election year. Full disclosure, we did see recessions begin in January in 1970 and 2008, so those were just a month away. But all in all, this is another potential positive for the bulls in 2023.
Lastly, stocks soared yesterday as investors realize that the Fed will likely end their series of aggressive rate hikes potentially quite soon. As a result of yesterday’s big move, the S&P 500 closed above its 200-day moving average for the first time in more than seven months. We took a look, and this could be potentially quite bullish.
As you can see here, previous times that saw streaks end at least six months beneath the 200-day moving average resulted in solid performance going forward. In fact, since 1950, only one out of 13 times stocks went on to make new lows, which was in 2002.
Here are the longest streaks beneath the 200-day moving average and what happened once the streak ended. Up 18.8% a year later and higher more than 92% of the time is one thing that could have bulls smiling in 2023.
Will Santa Bring Jolly or Coal to Investors This December?
Can you believe it? We’ve made it to the last month of the year! I don’t know about you all, but I’ll be pretty happy to wish 2022 goodbye as soon as possible. But the good news is that we continue to think the mid-October lows were the lows from the bear market, and continued good times could be coming. I’ll break down some positive signs tomorrow on the blog, but today I’ll show why there’s a chance Santa will come to town and bring some green with him this December.
First things first, December is historically known as one of the best months for investors, and this is true. Only once did the S&P 500 see December turn out to be the worst month of the year. That was in 2018 when the Fed made one rate hike too many, and investors weren’t very festive about things, sending December down a record 9.2%.
As the chart shows below, December is still up over the past ten years (so including that massive drop in 2018), and that is mainly because the past three years, this final month has gained 2.9%, 3.7%, and 4.4%, respectively. Looking further, it ranks as the third-best month since 1950, with only April and November better. In fact, until 2018, this month was historically the best. Lastly, in a midterm year, October is the best month, November is the second best, and December is the third best.
Some other things to know:
When stocks are down for the year heading into this month, December has been higher eight of the past nine times.
Stocks have finished green in December for the past three years, the longest such streak since six in a row from 2008 to 2013.
Midterm years have been worse lately, down a record 9.1% last time (in 2018) but also down in 2014. At least we’ve never seen stocks down three Decembers in a row during midterm years.
When stocks are up in both October and November (which could be the case this year as long as we don’t see a massive drop today), the S&P 500 doesn’t do quite as well in December, up 0.75% on average compared with the average December return of 1.54%, suggesting the prior months could be taking some of December’s historical strength.
Lastly, only once in history has December been the worst month of the year for the S&P 500. That was in 2018 when the Fed hiked rates one more time, and it caused massive selling, but this month is usually quite calm, and big drops are rare.
The bottom line is that with inflation likely peaking, the U.S. dollar weakening, positive seasonals, a potentially more dovish Fed, investors still extremely bearishly positioned (bullish from a contrarian point of view), broadening overall market participation, a stronger than expected consumer, and crude oil back to near flat for the year, there are many former headwinds, which have now become potential tailwinds. When all is said and done with 2022, we wouldn’t be surprised to see this year end higher than where it is today.
A Popular Recession Indicator is Flashing Bright Red. Should We Worry?
A political strategist once said that if there were reincarnation, he would want to come back as the bond market. “You can intimidate everybody,” as he put it. With good reason, investors watch bond markets carefully for all sorts of signals about the economy, monetary policy, and inflation.
And right now, a key signal from the bond market – the yield curve – is flashing bright red, warning about impending recession. The yield curve is simply a curve showing interest rates on US treasury bonds across various maturities. Yields on the short end of the curve, i.e., smaller maturities, typically rise and fall depending on what investors expect the Federal Reserve (Fed) to do over the next year or two. Interest rates on the long end of the curve, with maturities of 5 years or more, are typically higher than those on the short end. If investors anticipate higher growth and inflation, they will demand much higher interest rates, widening the “spread” of difference between short and long-term yields.
In extreme cases, we get inverted yield curves, with short-term rates higher than long-term rates. This normally does not make intuitive sense since it implies that long-term investors, who face more uncertainty and risk, are settling for less compensation than short-term investors. It typically happens when the Fed raises interest rates to prevent overheating of an economy (like they have this year), while bond market investors kind of take the opposing view – believing that the Fed will go too far and push the economy into recession, which would be accompanied by much lower inflation and hence, lower long-term yields.
The yield curve inverted prior to the last ten recessions, with just one false signal in 1965. The table below shows yield curve inversions (as defined by the 10-year/1-year spread turning negative), along with the timing of the recession that followed. No surprise that this is a favored recession indicator.
The chart below shows how the 10-year/1-year spread has gone negative prior to the shaded bars, i.e., recessions. The bad news is that this spread inverted back in July of this year and is currently at its most negative, or “inverted state,” since 1982. Indicating a recession is on the horizon if you consider the historical precedent.
What does it really tell us, beyond “Yes, Recession”
One thing you notice from the table and chart above is that while a recession has followed inversion, the degree of inversion doesn’t say anything about the following:
When a recession will start – the start time has varied from 7 to 24 months
How long the recession will last – we had prolonged recessions in 1974 and 2008, and the degree of inversion was quite different prior to these
How deep the recession will be – the degree of inversion was similar prior to the 2001 and 2008 recessions, but these were very different economic drawdowns Another huge caveat I would add to the track record: the inversion in 2019 technically preceded the 2020 recession, but it didn’t really “predict” it in that it didn’t predict Covid-19.
Also, the yield curve has a bit of a dubious record outside the US, as this study from the St. Louis Federal Reserve points out. Several yield curve inversions occurred in the U.K. and Canada that did not predate recessions, i.e., you had a lot of false signals. But it worked better in the US, France, and Germany.
A symptom rather than a cause
Yield curve inversion is more of a symptom rather than a cause. The logic is that the Fed tightening too far leads to an expectation of slower economic growth (or recession), which leads to lower inflation expectations (there’s less demand for goods and services). Which in turn results in long-term yields falling below short-term yields. To a first approximation, long-term yields are simply the expected path of future short-term rates, i.e., monetary policy. And so, if inflation is expected to be lower in the future, especially amidst a recession, you would expect the Fed to reduce rates.
Note that higher rates can take their toll on the economy. For example, housing activity can decline amid higher mortgage rates, and businesses may cut back on spending/hiring if they find borrowing terms to be much higher. But these usually occur only with a lag – which is why a recession doesn’t follow immediately after the Fed raises rates and yield curves invert.
Look toward inflation expectations
With respect to yield curve inversions, a lot of it comes down to inflation expectations. Inflation expectations can fall if investors expect a recession.
But, longer-term inflation expectations can also be lower than short-term inflation expectations if inflation has surged recently and investors believe it to be a short-term phenomenon. Sound familiar?
It’s not easy to directly gauge inflation expectations, but we can calculate them using securities called inflation swaps. Without getting into too much detail, these are used to transfer inflation risk from one entity to another. You have swaps ranging over various periods, e.g., 1, 2, 3, 5, and 10 years, which can tell you what investors expect inflation to average over these periods.
The chart below shows 1-year inflation expectations versus 1-year/9-year forward inflation expectations. The latter is the inflation expectation over the 9-year period that begins one year from now – my goal is to separate short-term inflation expectations from longer-term expectations. As you can see, 1-year inflation expectations surged above longer-term expectations over the past 18-20 months. Prior to 2021, the 1-year/9-year forward expectation was mostly above the 1-year. But they’re converging again, with investors expecting inflation to average about 2.7% over the next year. At the same time, the 1-year/9-year forward expectation is just under 2.6%.
What also comes out of the graph is that during the 2008 and 2020 recessions, 1-year inflation expectations collapsed well below the longer-term series. Based on that, it doesn’t look like markets are expecting a recession now.
1-year inflation expectations are still slightly above the 1-year/9-year forward inflation expectation
1-year/9-year expectations have barely fallen, in contrast to what we saw in 2008 and 2020 when they were below 2% Could we be headed for stagflation, i.e., a recession with high inflation? Well, the 1-year/9-year forward expectation is around 2.6% right now – it doesn’t exactly scream stagflation, let alone high inflation.
To wrap up, the yield curve may be as inverted as it is today because the Fed is hiking short-term rates even as long-term yields fall on the back of lower inflation expectations – in a sense vindicating the rate hikes. However, there are other factors, including a reversal of supply-chain-related issues that pushed inflation higher in the first place. My colleague, Ryan Detrick, and I have written quite a lot about why we think inflation is off the boil (see here and here).
And just as important, inflation expectations beyond a year are not pointing toward a deflationary recession or stagflation, for that matter.
Of course, investors could be wrong, and things could change in a hurry. This is something I’ll be watching closely.
Typical December Seasonal Pattern Begins Dull Pops Mid-Month
December’s first trading day has been bearish for S&P 500 and Russell 1000 over the last 21 years. A modest rally through the fifth or sixth trading day also has fizzled going into mid-month. It is around this point that holiday cheer tends to kick in and propel the indexes higher with a pause near month-end.
Small caps tend to start to outperform larger caps near the middle of the month (early January Effect, 2023 Almanac pages 112 &114). The January Effect is not to be confused with the January Barometer (2023 Almanac page 18), which states as the S&P 500 goes in January, so goes the year.
The “Santa Claus Rally” begins on the open on December 23 and lasts until the second trading day of 2023. Average S&P 500 gains over this seven trading-day range since 1969 are a respectable 1.3%. The “Santa Claus Rally,” (2023 STA p 118) was invented and named by Yale Hirsch in 1972 in the Almanac.
This is our first indicator for the market in the New Year. Years when the Santa Claus Rally (SCR) has failed to materialize are often flat or down. As Yale Hirsch’s now famous line states, “If Santa Claus should fail to call, bears may come to Broad and Wall.”
December #2 Small Cap #3 Large Cap Tepid Start Solid Finish
Trading in December is holiday-inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and yearend portfolio restructuring begins.
December is the number three S&P 500 and Dow Jones Industrials month since 1950, averaging gains of 1.5% and 1.6% respectively. It’s the second-best Russell 2000 (1979) month and fourth best for NASDAQ (1971). It is also the third best month for Russell 1000 (1979).
In 2018, DJIA suffered its worst December performance since 1931 and its fourth worst December going all the way back to 1901. However, the market rarely falls precipitously in December and a repeat of 2018 does not seem highly likely this year.
When December is down it is usually a turning point in the market—near a top or bottom. If the market has experienced fantastic gains leading up to December, stocks can pullback in the first half of the month.
In the last eighteen midterm years, December’s rankings slip modestly to #5 DJIA (0.9%), #3 S&P 500 (1.2%) and #7 NASDAQ (–0.3% since 1974). Small caps, measured by the Russell 2000, also tend to soften in midterm Decembers. Since 1982, the Russell 2000 has lost ground just three times in ten midterm years in December. The average small cap gain in all ten years is 0.3%. Midterm December performance had been stronger prior to previously mentioned December 2018.
Here are the most notable companies reporting earnings in this upcoming trading week ahead-
(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)
(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 12.5.22 Before Market Open:
Monday 12.5.22 After Market Close:
Tuesday 12.6.22 Before Market Open:
Tuesday 12.6.22 After Market Close:
Wednesday 12.7.22 Before Market Open:
Wednesday 12.7.22 After Market Close:
Thursday 12.8.22 Before Market Open:
Thursday 12.8.22 After Market Close:
Friday 12.9.22 Before Market Open:
Friday 12.9.22 After Market Close:
(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
(T.B.A. THIS WEEKEND.)
(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).
DISCUSS!
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂
