Investors are trying to read the tea leaves in a jittery U.S. stock market to gauge whether its recent rally can continue after Federal Reserve Chairman Jerome Powell sparked upbeat sentiment in late November when he suggested his aggressive rate hikes could slowed down.
“The stock market leadership is telling you that the economy is not going to collapse under the weight of the Fed in the near future,” Andrew Slimmon, senior portfolio manager for equities at Morgan Stanley Investment Management, said by phone. an interview. “I think you’re going to hit a strong market at the end of the year.”
Slimmon pointed to the performance of cyclical sectors of the market, including financials, industrials and materials over the past few months, and said those sectors would be “dying” if the economy and corporate profits were on the verge of collapse.
A good 263,000 new jobs were created in the United States in November, which exceeded the forecast of 200,000 by economists polled by The Wall Street Journal. The unemployment rate remained unchanged at 3.7%, the US Bureau of Labor Statistics said on Friday. That’s nearly a half-century low. Meanwhile, hourly wages rose 0.6% last month to an average of $32.82, the report showed.
Labor market “resilience” and a “resurgence in wage pressures” will not prevent the Fed from slowing the pace of rate hikes this month, Capital Economics said in an email on Friday. Capital Economics said it still expects the central bank to cut the size of its next interest rate hike in December to 50 basis points, after a string of 75 basis point hikes.
“In the bigger picture, a strong labor market is good for the economy and bad only because of the Fed’s mission to stifle inflation,” Louis Navellier, chief investment officer at Navellier, said in a note on Friday.
The Fed raised its benchmark interest rate to tame high inflation, which showed signs of easing in October based on consumer price index data. This week, investors will get data on wholesale inflation for November, as measured by the producer price index. PPI data will be released on December 9.
“It’s going to be a significant number,” Slimmon said.
According to Jeffrey Kleintop, chief global investment strategist at Charles Schwab, the producer price index is driven much more by supply issues than by consumer demand.
“I think the pressures on PPI have peaked based on the decline we’ve seen in supply chain issues,” Kleintop said in a phone interview. He said he expected the upcoming PPI print could reinforce the general message that central banks are slowing raising interest rates.
This week, investors will also be keeping a close eye on initial jobless claims data due on Dec. 8, a leading indicator of the health of the labor market.
“We’re not out of the woods,” cautioned Morgan Stanley’s Slimmon. While he is bullish on the stock market in the near term, in part because there is “a lot of money on the sidelines” that could fuel growth, he pointed to the inverted yield curve of the Treasury market as a cause for concern.
Inversions, when short-term Treasury yields rise above long-term rates, have historically occurred before recessions.
“Yield curves are great predictors of an economic slowdown, but they’re not very good predictors of when that will happen,” Slimmon said. His “suspicion” is that a recession could come after the first half of 2023.
‘Extensive technical renovation’
Meanwhile, the S&P 500 ended slightly lower at 4,071.70 on Friday, but still posted a weekly gain of 1.1% after rising on Nov. 30 on Powell’s remarks at the Brookings Institution that suggested the U.S. could The Fed reduced the scope of its interest rate hikes in December. 13.-14. political meeting.
“Bears downplayed” the rally caused by Powell, saying his speech was “hawkish and did not justify the market’s bullish spin,” Yardeni Research said in a Dec. 1 emailed note. But “we believe the bulls are correct in their perception that inflation peaked this summer and were relieved to hear Powell say the Fed may be willing to let inflation moderate without pushing the economy into recession.”
While this year’s inflation crisis has caused investors to focus “only on danger, not on opportunity,” Powell suggested it’s time to look at the latter, as Tom Lee, head of research at Fundstrat Global Advisors, said in note on Friday morning. Lee was upbeat ahead of Powell’s Brookings speech, detailing 11 headwinds in 2022 that have ‘turned’ in a November 28 note.
See: Stocks could see ‘fireworks’ by end of year as winds ‘turn’, says Fundstrat’s Tom Lee
The S&P 500 broke back above its 200-day moving average, which Lee pointed out in a note before the market opened on Friday. He pointed to the index closing above this moving average for the second day in a row as a “major technical recovery” and wrote that “this didn’t happen in the ‘crisis’ of 2022 (see below), so this is a break in the pattern .”
On Friday, the S&P 500 SPX,
again closed above its 200-day moving average of 4,046 at the time, according to FactSet data.
In a note on Friday, Navellier said the 200-day moving average was “important” to watch for the day, as the U.S. stock market benchmark could finish above or below it “leading to further momentum in either direction.”
But Charles Schwab’s Kleintop says it might “give a little less weight to the technicals” in a market that is currently more macro-oriented. “If a simple word from Powell could push” the S&P 500 above or below its 200-day moving average, he said, “it may not be so much a result of supply or demand for capital by individual investors.”
Kleintop said he is watching for a risk to the stock market this week: a cap on Russian oil prices that could take effect as soon as Monday. He is worried about how Russia will react to such a restriction. If the country decides to withhold oil from the world market, this could result in “oil prices CL.1,
raise again’ and increase inflationary pressures.
Read: The G7 and Australia join the EU in capping Russian oil prices at $60 a barrel
Navellier, who said a “soft landing is still possible” if inflation falls faster than expected, also raised concerns about energy prices in his note. “One thing that could reignite inflation would be a spike in energy prices, which is best hedged against with excessive exposure to energy stocks,” he wrote.
“Volatility is likely to remain high,” Navellier said, pointing to “the Fed’s determination to keep pushing on the brakes.”
U.S. stocks have seen some big swings recently, with the S&P 500 climbing more than 5% last month after jumping 8% in October and sliding more than 9% in September, according to FactSet data. Major benchmarks finished mixed on Friday, but the S&P 500, Dow Jones Industrial Average DJIA,
and the technologically demanding Nasdaq Composite COMP,
each rose for the second week in a row.
“Keep a bias toward quality earners,” Navellier said, “take advantage to add pullbacks.”