The market has once again entered a phase where, counter-intuitively, some bad news is considered a positive for stocks. Namely, investors are welcoming any sign that the Federal Reserve’s money tightening efforts are having their desired effects. The reasoning being that: the closer the central bank gets to ending its run of interest-rate increases, the sooner it can start bringing them back down again. In turn, that should result in lower fixed-income yields, making equities more attractive to investors. Yesterday, the Labor Department reported that the number of jobless claims increased by 9,000 compared to the week before, to 225,000 individuals, slightly higher than consensus estimates.
In response, stocks rallied on Thursday. The Dow Jones Industrials moved up 345 points, or 1.15%, the S&P 500 gained 66 points (1.8%), and the tech-focused NASDAQ moved 264 points higher, or 2.6%. Despite yesterday’s gains, the major indexes still show significant losses for 2022. With the Dow down 8.6% year to date, the S&P 500 off by 19%, and the NASDAQ down a staggering 33%, they appear headed for their worst year since 2008.
The prospects for 2023 aren’t too encouraging, at this point. The Federal Reserve has maintained that interest rates will need to go higher, and likely be sustained at an elevated level, at least into 2024. The fear is that the lead bank may go too far, thus triggering a recession. The best case scenario would be for a “soft landing”, meaning any downturn would be mild, and the economy rebounds quickly. As it stands, the market consensus is calling for most large companies to generate lower earnings in the New Year, and defensive sectors like utilities and everyday consumer products continue to be favored.
As we approach the start of the last trading day of the year, U.S. stock futures have reversed course and are now in negative territory. In overnight trading, stocks in Asia closed up, despite a surge of COVID-19 cases in China. Meanwhile, the European indexes are firmly in the red. Elsewhere, oil prices have ticked lower, with West Texas Intermediate down about a quarter percent, to around $78.20 a barrel. With many market participants taking time off between Christmas and New Year’s, trading volume remains low, which means price moves tend to get exaggerated, resulting in elevated volatility. – Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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