Negative mood could pervade market next week as investors search for stability before the holidays
Stocks seem locked in a downward spiral , but some strategists say there is still a chance the market could temporarily steady as market pros head off for the holidays. “We can trust we will see downside but it might be mitigated by positive seasonal influences,” said Katie Stockton, founder of Fairlead Strategies. Stocks are typically higher in December, and the second half of the month is historically the best period. So far this December, the S & P 500 is down about 6%. Stocks were battered in the past week, as investors reacted to a hawkish message from the Federal Reserve. The central bank delivered an expected half percentage point rate hike but upped its forecast for future rate increases. The mood darkened even more after November retail sales Thursday showed a deeper-than-expected decline of 0.6%. The S & P 500 ended Friday at 3,852, with a 2.1% decline for the week. Where’s Santa? “I think people want to ease into the yearend and I don’t think the market’s going to allow that,” said Keith Lerner, Truist Advisory Services co-chief investment officer and chief market strategist. “The market feels heavy, even with this pullback. Some people were hoping for at least a rally into yearend, and you’re starting to see people giving up on that now . It doesn’t mean it won’t rally a little bit. Any type of move up will probably be more muted than was expected.” The calendar in the week ahead is relatively quiet with very few earnings, but some interesting insight into the housing market with Monday’s December home builder survey; Tuesday’s November housing starts; November existing home sales Wednesday and November new home sales Friday. Nike, FedEx and General Mills report Tuesday and Micron releases results Wednesday. There is also the important personal consumption expenditure data for November due on Friday, and that includes the PCE deflator, the Fed’s preferred inflation measure. In the past week, stocks rallied Tuesday after the consumer price index showed a smaller-than-expected increase of 7.1% for November. That was below October’s 7.7% rate. “There’s a lot of housing data next week,” said Art Hogan, chief market strategist at B. Riley Financial. “That will help us remember that the calculation of CPI and the PCE are lagging indicators. Real data will show us housing is coming down much faster than shows up in those two reports.” JPMorgan estimates the November report on PCE inflation next Friday could show a slower rate of price increases. “With November data from the CPI, PPI, and import price index now in hand, we think the core PCE price index will be up 0.14% in November,” JPMorgan economists wrote. “This would allow the year-ago rate on the core PCE measure to ease from 5.0% in October to 4.6% in November.” Market overreacted Hogan expects the coming week’s data will not distress the market any more than it is already. “I think the sort of overreaction to the combination of the modestly more hawkish Fed and the retail sales, which were probably pulled forward into October…likely dissipates a bit next week,” said Hogan. “We certainly seem to have overreacted in the near term.” Hogan sees a chance the market will edge higher in the Santa Claus rally period at the end of the month. He said the fact the Fed raised its terminal rate, or end rate, to 5.1% in 2023 was not a surprise, and the market continues to price in a rate cut by the end of next year. The Fed laid out its views on rates in the so-called dot plot, a chart showing the anonymous forecasts of Fed officials for fed funds. It did not include a rate cut until 2024. “The fed funds futures are reflecting a pullback of 25 basis points in the fourth quarter and the dot plot is not. The dot plot has not had a great track record,” said Hogan. “If that’s what the market is reacting to, it’s likely to dissipate a bit next week.” Stockton, a technical strategist, said her charts had warned of a rough time for stocks. Her overbought signal was flashing before the sell-off this week. “The conversations are pretty depressing these days,” she said, noting she recommended a “sell the news” posture at the beginning of the week. “Counter trend signals unfolded at the start of the week, giving way to a greater loss of short-term momentum,” she said. There were some significant breakdowns, including in Apple, which looks like it will continue to be a source of weakness. Stockton said the next support level for the stock is $127. Apple is the biggest stock by market cap so it has an oversized influence on the S & P 500 and other indexes. The stock slipped below $135 Friday afternoon. As for the broader market, the S & P 500 has been trapped below 4,100, and some strategists don’t see it going much higher even if the market can rebound. “You could have these swings like we had this week,” said Truist’s Lerner. “At some point, if we rebound, that 4,100 is a pretty tough resistance point. People sold that pretty hard.” Lerner said the he went to an underweight holding in stocks in September, overweighted fixed income and has retained that positioning since. “We’re staying with health care and staples, which are defensive plays. We have a bar bell going where we’re overweight industrials and energy,” he said. Industrials are influenced by geopolitical trends, and defense has been strong within the sector, he said. The worst performing sector in the past week was consumer discretionary, down about 3.6%. Tech was off 2.7%, and financials lost 2.5%. Staples took a 1.4% hit, and health care was off 1.8%. The only positive major industry sector was energy, up 1.8%. “One of our focuses in fixed income is high quality,” said Lerner. “Any move closer to 4% in the 10-year yield would be another buying opportunity in fixed income. We think that would be a good area to invest in high quality and government bonds and extend duration.” Bond market defiance The bond market has defied the Fed this past week, with rates languishing even as the Fed turned up the heat with a new terminal rate above 5%. Bond strategists say the market is reacting to worries that the Fed will tighten too much and trigger a recession, while stocks are worried about higher interest rates and weaker corporate profits next year. The 10-year yield was at 3.48% Friday. Ned Davis Research pointed out in a note this week that there has been a recent negative correlation between stocks and bonds, meaning stocks are falling and so are yields. Yields move opposite to bond prices, and the correlation for a long time had been falling yields meant higher stocks, particularly growth and tech shares. Ned Davis expects the negative correlation to continue for the foreseeable future, and is watching the rolling one-year correlation between the S & P 500 and the 10-year Treasury yield. “The correlation is -0.11, the lowest since February 2007. Prior to October 2022, the correlation had not been negative since July 2007,” they noted. The firm’s equity strategists said one interpretation could be that inflation “is regaining the upper hand, so rising bond yields are again negative for stocks.” They added that since 1998, negative correlations signaled the Fed had tightened too much. But in the years prior to 1998, correlations were negative because inflation was seen as a bigger threat than deflation. Week ahead calendar Monday 10:00 a.m. NAHB survey Tuesday Earnings: Nike, FedEx, General Mills 8:30 a.m. Housing starts 8:30 a.m. Building permits Wednesday Earnings: Micron, RiteAid 8:30 a.m. Q3 Current account 10:00 a.m. Existing homes 10:00 a.m. Consumer confidence Thursday Earnings: Carmax 8:30 a.m. Initial jobless cl a ims 8:30 a.m. Real GDP Q3 (final) 10:00 a.m. Leading index Friday 8:30 a.m. November durable goods 8:30 a.m. November personal income/spending 8:30 a.m. Personal consumption expenditures deflator 10:00 a.m. New home sales 10:00 a.m. December consumer sentiment
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