Fed tempers expectations

The stock market’s fall rebound got its first serious challenge last week, as bears dominated the beginning of November as the Federal Reserve seemed determined not to appear too dovish, too soon in its fight against inflation.

The S&P 500 (SPX) fell every day but one last week, including a 2.5% drop on Wednesday in the wake of the Fed’s latest rate hike. Friday’s rally after a stronger-than-expected jobs report trimmed the week’s losses, but not enough to pull the market out of the red:

The headline: Fed holds the line, stocks don’t.

The fine print: After a fourth-straight 0.75% rate hike, investors may have been hoping the Fed would signal it was thinking about smaller increases and an eventual pivot to rate cuts. Instead, Fed Chairman Jerome Powell said it was “very premature” to talk about pausing rate hikes.¹ The message: Forget about the pace of tightening, we’re going to take interest rates where we think they need to go.

The move: The SPX’s reversal from a 1% intraday gain 40 minutes after last Wednesday’s Fed announcement to a 2.5% loss by the end of the day.

The number: 61.5%, the odds (as of Friday) that the Fed would hike rates by 0.5% at its December 14 policy meeting.²

The scorecard: The Nasdaq 100 (NDX) tech index suffered its biggest weekly decline since January:

Sector performance: The strongest S&P 500 sectors last week were energy (+2.3%), materials (+0.8%), and industrials (+0.3%). The weakest sectors were communication services (-7.6%), information technology (-7.2%), and consumer discretionary (-6.1%).

Stock movers: Abiomed (ABMD) +50% to $377.82 on Tuesday, Bandwidth (BAND) +42% to $17.42 on Wednesday. On the downside, Rogers Corp. (ROG) -44% to $127.83, and Enovix (ENVX) -41% to $10.53, both on Wednesday.

Futures: After Friday’s 5% jump, December WTI crude oil (CLZ2) ended last week at a nine-week high of at $92.61/barrel. December gold (GCZ2) rallied more than 3% on Friday to close at a three-week high of $1,676.60/ounce. Week’s biggest up moves: December cotton (CTZ2) +20.6%, December natural gas (NGZ2) +13.9%. Week’s biggest down moves: November butter (CBX2) -6.8%, December E-Mini Nasdaq 100 (NQZ2) -6.3%.

After the midterm elections, inflation will likely reclaim the market spotlight:

●Monday: Consumer Credit
●Tuesday: NFIB Small Business Optimism Index, midterm elections
●Wednesday: Wholesale Inventories
●Thursday: Consumer Price Index (CPI)
●Friday: Consumer Sentiment, Veterans Day (banks and Treasury market closed)

This week’s earnings include:

●Monday: Shift 4 Payments (FOUR), Activision Blizzard (ATVI), BioNtech (BNTX), Lyft (LYFT), Five9 (FIVN)
●Tuesday: Occidental Petroleum (OXY), Disney (DIS), Upstart (UPST), Lemonade (LMND), Silk Road Medical (SILK), Plug Power (PLUG), Wynn Resorts (WYNN)
●Wednesday: Rivian Automotive (RIVN), Bumble (BMBL), Beyond Meat (BYND), Wendy's (WEN), Roblox (RBLX), Trade Desk (TTD), D R Horton (DHI)
●Thursday: Ralph Lauren (RL), Tapestry (TPR), Beazer Homes (BZH)
●Friday: Royal Gold (RGLD)

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

Sometimes things happen in the markets that just “feel” bullish or bearish in the moment. Traders and investors always need to be wary of attaching too much significance to those feelings.

Consider last Tuesday and Wednesday, when the SPX gave up roughly 1% intraday rallies and closed lower each day. At a glance, that type of price action suggests the market had a rather significant—and bearish—change of heart. After all, since 1983 the SPX has closed higher 92% of the time whenever it was up 1% or more intraday.³

That’s why the lower closes on Wednesday and Thursday likely seemed perfectly logical to many traders: Bears appeared to wrest control of the market from the bulls one day, and stocks followed through to the downside the next day.

That “logic” flies in the face of the numbers, though, since the market has bounced back after these intraday reversals more often than it has fallen. The SPX closed higher the next day 53% of the time—not a huge margin of victory for the bulls, perhaps, but certainly nothing to merit a reflexively bearish reaction when such days occur.

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¹ The Wall Street Journal. Powell Says 'Premature' to Discuss Hike Pause. 11/2/22.
² CME Group. FedWatch Tool: Target Rate Probabilities for 14 Dec 2022 Fed Meeting. 11/4/22.
³ All data reflects S&P 500 (SPX) daily prices, 1983–2022. Supporting document available upon request.