Weekly Market Update: December 5, 2022
The attention of Wall Street will turn to the Federal Reserve’s next monetary policy decision. The two-day Federal Open Market Committee (FOMC) meeting, which commences on December 13th, is expected to produce a half-point hike to the federal funds rate, bringing the range to 4.25%-4.50%. This would come on the heels of four straight 0.75% increases. Both Treasury market yields and the value of the U.S. dollar fell in anticipation of a slightly-less-hawkish move and fueled a November equity market rally.
A better-than-feared third-quarter earnings season also provided support for equities. That said, the earnings growth rate for S&P 500 companies was still just nominally above 2%, which marked the worst showing since the coronavirus-impacted third quarter of 2020. Further, prognostications for fourth- quarter earnings call for a low-single-digit decline, reflecting the effects of the Fed’s aggressive monetary policy tightening aimed to slow demand and ultimately bring down prices.
The central bank is expected to continue raising interest rates in 2023, albeit at a likely more-measured pace. Several regional Fed Presidents recently echoed Chairman Jerome Powell’s position that the benchmark short-term interest rate needs to reach 5.00% by mid-2023 and stay at that level for a longer duration to meaningfully tame inflation.
The news from overseas is not making the Federal Reserve’s task any easier. Shortly before we went to press, there were protests in China over the country’s restrictive COVID- 19 controls. The unrest brought renewed concerns about possible supply-chain disruptions, which, along with the energy supply pressures in Europe, may add to ongoing global inflationary pressures.
Talk of a stateside recession in 2023 is not going away. The central bank’s decision to continue raising interest rates into a period of decelerating economic growth may exacerbate the expected 2023 slowdown in demand. The Treasury market yield curve remains inverted with shorter term rates higher than long, and that has historically indicated a future economic slowdown.
Conclusion: While a “Santa Claus” rally can’t be ruled out, there are many variables in play, including Fed policy, overseas turmoil, and slowing growth stateside, that may produce some more trading volatility during the final month of a year that has been quite challenging for investors.