Weekly Market Update: November 28, 2022
The consumer will likely move into the spotlight now that the holiday season has arrived. Notably, retail sales rose 1.3%, month over month, in October, which was nicely higher than analysts had expected. Nonetheless, as shoppers head to the stores in the days ahead, it remains to be seen if retailers will have to resort to deep discounts and promotions to remain competitive. Further, consumer debt has been rising lately, which is of some concern.
Inflation may have peaked over the summer, but more work might still be needed to bring it closer to the target envisioned by the Federal Reserve. Specifically, the latest reports suggest that consumer price inflation has begun to decelerate. However, inflation still runs well above the Federal Reserve’s 2% target rate, as measured on the PCE (Personal Consumption Expenditures) Price Index. As a result, some economists wonder if the central bank can adequately address the situation, which reflects a complicated set of issues (wage pressures, a constrained labor force, supply-chain disruptions, military hostilities, alternative energy adoption). The Fed has implemented four consecutive 75-basis point interest rate increases this year. Most market observers think a 50-basis point hike will be passed in December, indicating a softer stance.
Elsewhere, the third-quarter earnings season has largely concluded. Although numerous companies managed to exceed expectations, earnings advanced nominally and corporate outlooks have been lackluster. Further, many companies (Meta Platforms, Amazon.com, Microsoft, etc.) have announced staff reductions, suggesting expansion is not a priority.
The stock market found support in mid-October. The S&P 500 Index fell to the 3,500 level, but then quickly reversed course. Since then, stocks have managed to rally, but it remains to be seen if the recent strength will carry through the holiday season. From a sector perspective, leadership can be seen in the basic materials, industrial, and financial issues. The technology stocks, which have been vital in the past, have not been fully participating in the upswing.
Conclusion: Attempting to time the market can be challenging. Investors with longer time horizons should seek out quality stocks that have reasonable valuations. The market is currently trading at a price-to-earnings multiple of around 16, and many issues look compelling.