Good morning contrarians! It is Friday, Dec. 23. Happy Christmas Eve eve.
Stocks cratered yesterday, led by tech. The Nasdaq was down more than 2% as the S&P 500 dropped by 1.5%. This was actually well off the lows of the day. Again no clear catalyst for the move. Some concerns about Micron (MU 0.00%↑) earnings, which happened the previous night. Tesla (TSLA 0.00%↑) continues to be a point of concern as well. That stock fell 9% yesterday.
State of Play
As of 0610 it looks like some cautious risk-on could be developing:
Stock futures are showing signs of life, led by the Russell 2000 which tracks small caps (+0.9%). Nasdaq futures are up 0.5%;
Commodities are gaining ground, with WTI crude oil up almost 2% to trade around $79/barrel. Copper is up 1.5%. First time we’ve seen that this week from copper;
Cryptos continue to tread water, with Bitcoin changing hands around $16,900;
Bonds aren’t doing much either. The 2-year yield is 4.28%, up 2 basis points, whilst the 10-year is up 3bps to 3.70%. Worth pointing out that the 10-year has sold off quite a bit this week, having ended last week around 3.43%.
Economic Data
There’s one big economic data release today, which is the Personal Consumption Expenditures Price Index, also known as the PCE Deflator. This is the Fed’s preferred inflation gauge, though the CPI still seems to move markets more. The US Bureau of Economic Analysis releases the PCE number at 0830.
Economists expect the core PCE price index, the most closely-watched one, to increase 0.2% month-over-month in November, identical to its gain last month. This would translate to a 4.7% year-over-year rise, below the 5.0% seen last month.
We also have durable goods orders out at 0830 as well. This will in all likelihood get overshadowed by the PCE Deflator but FWIW economists are expecting a decline of 0.6% MoM after rising 1.1% last month.
New home sales are out at 1000. The expectation here is for 600,000 new sales, down ab it from the 632,000 recorded last month.
You may also hear about Michigan Consumer Sentiment but that is just a follow-up reading that will likely confirm what was in the original report a fortnight ago. In other words: safe to ignore.
The Bottom Line
The PCE Deflator, for whatever reason, doesn’t move stocks as much as the CPI does. Maybe today will be different? It’s hard to draw any kind of rational conclusion from the stock market activity this week. There’s been very little in the way of new data and only a few earnings.
It looks like investors have been skittish ever since the Fed meeting early in the month. But the only fresh information out of that was about Fed officials’ projections for future interest rates. This is almost entirely a pointless fact as officials can and do (and should) change these projections when fresh data comes in.
What makes more sense is that there could be some tax-loss harvesting going on. Investors are selling losing positions to offset gains for tax purposes. After particularly heavy days of selling some bargain shoppers swoop in to buy stocks, which explains the occasional rebounds that we see, such as on Wednesday. Will today be another such example??
What Will the Story Be in ‘23?
Ultimately this is all rather pointless speculation. The key question is this: Will economic growth continue next year and will corporate earnings be able to expand apace? If not, how painful will a recession be? This assessment of risk should drive asset allocation now and in the opening weeks of 2023.
If one is of the belief that the economy is fundamentally in good shape and can continue to withstand whatever is thrown at it, then one will want to take this opportunity to add risk to the portfolio.
If one is more bearishly inclined, then besides feeling vindicated by this month’s activity, one will want to use each bounce as a fresh opportunity to dump risk.
Whatever your view, be sure to do your own research and make your own decisions.
This is likely the last podcast of the year. There is very little on the calendar for next week. If there is unexpected news that moves markets in a significant way we will return to revisit it. Otherwise, speak to you in 2023. Happy New Year!
Inflation Watch: Final Reading of 2022