Perspective :

Market Commentary | December 19, 2022

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No pivot in sight

As expected, the Federal Reserve raised rates last week for the seventh time this year, taking the target range to 4.25%-4.50% (the European Central Bank and the Bank of England also raised rates by 50 bps). While discussing recent inflation data, Chairman Powell acknowledged some improvement, but said that, “…it will take substantially more evidence to give confidence that inflation is on a sustained downward path.” That message finally seems to be settling in with market participants; previously markets had been acting as if the Fed would pivot in the not-too-distant future. However, hopes for a pivot and soft landing are increasingly giving way to recession concerns. Through the 16th of the month, small caps are down 7.1%, large caps are down 5.5%, and just about all major fixed income indices are solidly positive, with long-term Treasuries leading the way at +4.5%.

Consumers, battered by inflation, have begun to curb their spending as they fret about the future. According to the Commerce Department, November retail sales fell by 0.6% from the prior month, which was the biggest decline this year. Outlays for holiday goods, home projects, and autos all pulled back. This, even as initial jobless claims actually fell by 20,000, going in the opposite direction of expectations. And interestingly, despite flagging consumer sentiment, and what has been quite a volatile year for capital markets, retail investors have been dumping money into the stock market. The Wall Street Journal reported that, “U.S. equity mutual and exchange-traded funds…have attracted more than $100 billion in net inflows this year, one of the highest amounts on record in EPFR data going back to 2000.”

In addition to the decline in retail spending, manufacturing output in November declined by 0.6%, and S&P’s U.S. manufacturing PMI came in below survey estimates and at a level indicating further contraction.

On the plus side, input prices are falling which historically has led to lower inflation rates.

As we near year end, earnings estimates for the fourth quarter have been coming down. But according to FactSet[1], year-over-year earnings growth for the S&P for 2022 is still expected to be solidly positive at 5.1%. However, it is worth noting that the Energy sector has saved the earnings growth number; excluding Energy, the S&P would be expected to report a decline in earnings of 1.8%. Likewise, revenue growth for the index would be almost 3% lower save for Energy’s contribution.

While equity markets in the U.S. have been in a tizzy this month, overseas things have been a bit more stable. International small caps are mildly positive month-to-date (+0.21%), and international large caps, in dollar terms, are modestly lower (-34 bps). Emerging markets are holding up relatively well, down 1.5%, thanks to continued strength in China which has added almost 5% this month on top of last month’s roughly 30% gain. But sentiment has indeed shifted for the better concerning fixed income, as investors increasingly brace for what could be a difficult beginning to 2023.


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