Is the Market’s holiday rally on tract?
Fed Chairman Jerome Powell delivered a bagful of gains this week for investors. Stocks roared to life as "Santa" came to town. And then the job numbers on Friday spoiled the mood.
"The time for moderating the pace of rate increases may come as soon as the December meeting," said Powell, in his opening remarks at the Brooking Institute on Wednesday, November 30, 2022. The word 'moderating' was all the algos needed to hear.
It was equivalent to striking a match to a kid's backyard toy rocket. The U.S. dollar fell, stocks across the board exploded and the main indexes racked up gains of 3-4%-plus by the end of the day. Commodities also roared higher, led by precious metals.
Thursday, the Personal Consumption Expenditures Price Index, a key inflation data point that the Fed uses to monitor inflation also came in cooler for October. The PCE rose 6% in October versus last year and down from September's 6.3% annual increase. Overall, prices rose 0.3%, which was the same monthly increase in each of the previous two months. It could be that Powell had an inkling that the inflation numbers were improving, which could have contributed to the slight shifting of goalposts this week.
However, Friday's monthly jobs report for November came in "hot." Non-farm payrolls came in with a 263,000 gain versus the 200,000 expected. Average hourly earnings on a month-to-month basis rose 0.6% versus the 0.3% expected. That data may be good for the continued growth of the economy, but also means that the Fed has no reason to relent in its hawkish stance. As a result, markets gave back about a third of their gains for the week.
Does that mean we should expect hotter or cooler Consumer Price Index (CPI) on December 9th, and Price Producer Index (PPI) data on December 13th? Given the inaccuracy of macroeconomic data, I would say that is at best a crap shoot.
The most important events that investors face are the OPEC+ meeting on December 4, and the European Union (EU) Russian oil embargo and price cap on oil the following day. This could prove to be a disruptive event on world energy prices. What happens to the oil price has a direct bearing on future inflation, so financial markets will react to these events.
If an EU ban on purchasing Russian oil leads to the removal of up to 2 million barrels per day of oil from the market, we could see a spike in energy prices. To prevent that from happening, the U.S. and G-7 nations have devised a price cap scheme where that oil can be sold to non-European nations but only at a lower price. The question is the price.
The latest number was $62/bbl. cap. but Poland, Estonia, and Lithuania are arguing that the price is still too high. The facts are that if India or China ignore the whole price cap ban, which is a distinct possibility, then what could happen is that most of this spare Russian oil will simply be rerouted to these two large consumers of oil.
Bottom line: next week could see some wild swings in oil based on geopolitical headlines from various players so be prepared.
Last week, I wrote that my target for the S&P 500 Index of a high between 4,000-4,100 had been met and it was time to take profits. This week we hit the top end of my range before falling back. Could it climb higher? It could, but it seems to me that market action tells me that we are closer to a top, not a bottom. I will be taking profits as we climb higher.
If I am right, what is the potential downside for the markets? I expect a 125-to-250-point (up to 6% decline) to as low as 3,700 on the S&P 500 Index.
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.