Good news on the economy is bad news for the stock market
The good news on the economy has been bad news for the stock market. That's been the name of the game for the last several months. This week, we had more of the same.
The third and final revision of the U.S. third-quarter 2022 Gross Domestic Product came out on Thursday, December 22. It was revised up to an annual rate of 3.2 % from 2.9%. That's a sizable increase. The engine behind that growth was consumer spending and U.S. exports.
On the unemployment front, jobless claims for last week were roughly flat versus the previous week. That indicates that employment is still running hot. Neither of those data points gives the Fed any reason to relax its tightening schedule.
That was bad news for the stock market. All the main averages promptly declined between 2%-3% on Thursday. On Friday, the inflation index most watched by the Fed, the Personal Consumption Expenditures Price Index (PCE) for November, came in as expected (0.2% versus 0.3% in October), which the markets took in stride.
Investors, however, are so skittish that every data point is an excuse to run markets up or down. As I have warned readers in the past, selecting one or two data points and extrapolating a trend from them is a dangerous game, but that is exactly what the markets are doing.
As a result, stocks are ricocheting up and down on each announced data point. This becomes even more ludicrous when you realize all this data is not only highly inaccurate but will undergo revisions that many times are the opposite of the original announcement.
The most important event of the week happened overseas earlier in the week when the Bank of Japan finally joined the world's central banks in dumping its loose monetary policy stance of the last few years. After keeping its 10-year Japanese government bond yield below 0%, surprised global investors by allowing that yield to move 50 basis points on either side of its 0% target. That sparked a sell-off in bonds and stocks around the world while driving the yen up and the U.S. dollar down.
Unfortunately, things are looking rocky for that Christmas rally promised by so many talking heads on Wall Street. Many investors believe that because a Santa rally has happened so often in the past that one is just about guaranteed this year. But thus far, I would call this week a Santa Claws event. The problem is that these rallies are often momentum-based, meaning markets already in an uptrend, continue to trend higher. That has not been the case this year. If anything, looking at the year's performance, the momentum has all been to the downside.
The AAII Sentiment Survey tracks the opinion of individual investors on where they think the market is going. It is often used as a contrary indicator. This week the index hit the highest level of bearishness among investors in nine weeks at 52.3%, while the number of bulls registered was a paltry 20.3%. The spread between bulls and bears is negative at -32.0%. The dour readings should give bulls some encouragement that at some point soon we may see another relief bounce.
I expect that we continue our journey down toward my 3,700-3,800 target on the S&P 500 Index. If we reach that level soon, we could see an up day or three during the upcoming, holiday-shortened week ahead. But whatever upside we may get should not be confused with the primary trend, which is down for the first quarter of 2023.
My advice is to set aside the market for the next three days, and instead, focus on family, friends, and loved ones. Merry Christmas and Happy Hanukkah.
Bill Schmick is registered as an investment advisor representative of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.