Market tags five-week low

Halfway through December, investors are still waiting for a “Santa Claus Rally,” with stocks coming off back-to-back down weeks for the first time since September.  (Check back tomorrow for more insight on that Santa rally.)

The S&P 500 (SPX) hit a three-month intraday high after last Tuesday’s Consumer Price Index (CPI) report showed a larger-than-expected inflation decline (check out Morgan Stanley & Co.’s 2023 inflation forecast), but the momentum didn’t last. After reversing to close well off the day’s high, the market retreated the rest of the week amid hawkish comments from the Federal Reserve and soft economic data:

The headline: Inflation cools, Fed stands firm, stocks slip.

The fine print: Perhaps overlooked after Wednesday’s 0.5% rate hike, retail sales, industrial production, the Philadelphia Fed Manufacturing Index, and the Empire State Manufacturing Index all came in weaker than expected on Thursday.

The number: 5%–5.25%, the new estimate of how high the Fed will ultimately raise interest rates.¹ In his post-FOMC meeting statement, Fed Chair Jerome Powell drove home the point that rates could remain elevated for quite a while—i.e., rate cuts in 2023 appear unlikely.

The quote: “The historical record cautions strongly against prematurely loosening policy.” Jerome Powell in his post-FOMC meeting statement last Wednesday.

The scorecard: Large caps gave up the least ground, tech and small caps gave up the most:

Sector roundup: The strongest S&P 500 sectors last week were energy (+2%), utilities (-0.5%), and industrials (-1.2%). The weakest sectors were consumer discretionary (-3.6%), information technology (-2.7%), and financials (-2.4%).

Stock movers: Fluence Energy (FLNC) +26% to $21.73 on Tuesday, Maxar Technologies (MAXR) +125% to $51.93 on Friday. On the downside, Vanda Pharmaceuticals (VNDA) -31% to $7.43 on Tuesday, Novavax (NVAX) -34% to $11.32 on Thursday.

Futures: February WTI crude oil (CLG3) pushed as high as $77.45/barrel last Wednesday before pulling back to end the week at $74.47. February gold (GCG3) hit its highest level ($1,836.90/ounce) since July last Tuesday, reversed sharply on Thursday, and ended the week little changed at $1,802.90. Week’s biggest up moves: February heating oil (HOG3) +10.9%, January natural gas (NGF3) +5.7%. Week’s biggest down moves: March palladium (PAH3) -12.6%, January lumber (LBSF3) -6%.

In addition to housing data, this week brings the latest reading from the Fed’s preferred inflation gauge, the PCE Price Index:

●Monday: NAHB Housing Market Index
●Tuesday: Housing Starts and Building Permits
●Wednesday: Q3 Current Account, Existing Home Sales, Consumer Confidence
●Thursday: Q3 GDP (final revision), Chicago Fed National Activity Index, Leading Economic Indicators Index
●Friday: Durable Goods Orders (advance), Personal Income and Spending, PCE Price Index, Consumer Sentiment (final), New Home Sales

This week’s earnings include:

●Monday: Neogen (NEOG), Heico (HEI)
●Tuesday: FedEx (FDX), General Mills (GIS), Nike (NKE)
●Wednesday: Cintas (CTAS), Toro (TTC), Micron Technology (MU)
●Thursday: Apogee Enterprises (APOG), CarMax (KMX), Limoneira (LMNR), Paychex (PAYX)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

There have been only two full (trading) days since the Fed raised interest rates last Wednesday, so it remains to be seen how the market’s reaction to it will compare to its performance before and after this year’s other hikes.

Here’s a quick summary of how the SPX performed before and after the first six rate hikes of the year, in terms of whether it reversed or extended the short-term trend that was in place before the announcement:²

March 16: reversed (down to up)
May 4: extended (down)
June 15: reversed (down to up)
July 27: extended (up)
September 21: extended (down)
November 2: extended (up)

While the market extended the trend more often than not, last week’s rate hike presented an interesting situation, in that the SPX had been trading mostly sideways (with a slight upward bias) for the better part of a month at the time of the announcement. In other words, the market was consolidating, not trending, so from a short-term perspective at least, there was arguably no trend to reverse or continue.

Even though the SPX hit its highest intraday high since September last Tuesday, by the time the closing bell rang it was back within the bounds of the consolidation, and by Friday it had fallen below the low of that range.

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¹ CNBC.com. The Fed projects raising rates as high as 5.1% before ending inflation battle. 12/14/22.
² “Short-term trend” refers to whether the S&P 500 rallied or declined in the month leading up to the announcement. “Reversed” and “extended” refers to whether the S&P 500 rallied or declined in the first two weeks after the announcement.