The final trading week of 2022, a year that has been a difficult one for both equity and bond holders, begins with the broader S&P 500 Index and the tech-heavy NASDAQ Composite on multi-week losing streaks. The schedule for economic and earnings news is light this week. Low volume is expected due to many traders taking the holiday week off. Lastly, investors looking to do some tax-loss harvesting (more below) could potentially produce a few more volatile sessions to cap off what has been a very challenging 12 months for investors.
After a modest rebound for stocks to end last week, the equity futures are indicating some more buying at the start of today’s session. We think it may be the case of some bargain hunting after last week’s selloff and a positive reaction to reports that China will eliminate quarantine requirements for inbound travelers beginning January 8th, with the country broadening its reopening after three years of zero-COVID controls and travel restrictions. Some initial positive data on the holiday shopping season also may give a modest boost to trading stateside this morning.
According to credit card giant MasterCard (MA), U.S. retail sales excluding automotive increased 7.6% year-over-year this holiday season, running from November 1st through December 24th. The MasterCard SpendingPulse survey measures in-store and online retail sales across all forms of payment. However, because the data is not adjusted for inflation, the nearly 8% gain may not be as impressive at it looked at first blush. Too, the report showed some weakness in the electronics and jewelry areas, which may point to the consumer moving away from some of the luxury, big-ticket items, as inflation reduces spending power.
Meantime, this week will likely bring some trading strategies often used by investors at the end of the calendar year. Tax-loss harvesting is a strategy to lower current taxes paid to the U.S. federal government by selling an investment at a loss (i.e., taking a capital loss) in order to use that loss to offset taxes owed on an investment sold at a profit (i.e., a capital gain or even taxes owed on personal income). This event could potentially put some downward pressure on equities. Later this week, window dressing, a strategy used by mutual fund and other portfolio managers to improve the appearance of a fund's performance before presenting it to clients or shareholders, also may come into play.
As noted above, it will be a very sparse week of economic news, with the only report of significance coming on Thursday morning (at 8:30 A.M. EST) with data due on initial jobless claims data for the week ending December 24th. The estimate is calling for a small increase in jobless claims, to 220,000. Of late, the jobless figures have been low, which suggests that the labor market remains tight and that may put further pressure on the average hourly wage. There has been a negative reaction to the good jobless figures on Wall Street, as it has brought concerns that it will make the Fed’s task of tackling inflation even more difficult.
In general, any good news about the economy has not helped the near-term performance of the stock market, as positive data suggests that the economy remains in good enough condition to handle additional monetary policy tightening moves from the Fed. The central bank said at its final Federal Open Market Committee of this year in mid-December that the federal funds rate may need to rise above 5.00% and stay at that level for a longer period to effectively fight inflation. This more-hawkish monetary policy talk drove Treasury market yields and the value of the U.S. dollar against a basket of foreign currencies higher and sparked the most recent equity market selloff. All told, the Dow Jones Industrial Average, the S&P 500 Index, and the tech-heavy NASDAQ Composite start the final trading week of 2022 down 9%, 19%, and 33% year to date, respectively.
So what is an investor to do in this environment? We would still recommend maintaining a portfolio consisting mostly of stocks of high-quality companies and cash. We would focus on companies that have shown an ability to produce steady earnings growth and generate healthy cash flows even during difficult times for the economy. The presence of a dividend that generates a steady stream income for investors also is attractive during a stretch where positive returns have been hard to come by.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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