On a day that will be rather light on economic news, the market will continue to focus on a recent series of reports that have prompted a selloff on Wall Street. For the most part, the economic data have been positive, but the better-than-expected figures have brought renewed inflation concerns and sentiment that the Federal Reserve will need to continue raising interest rates to reduce demand for goods and services and ultimately rein in prices. Last week’s stronger-than-expected November jobs creation totals and a related increase in the average hourly wage (+0.6% versus the consensus forecast of +0.3%) ignited the initial selling in the current equity market decline, but now investors are reacting negatively to commentary from a chorus of banking leaders about a possible looming recession (more below).
At 8:30 A.M. (EST), we did get revised U.S. productivity figures from the Labor Department. Specifically the report showed that third-quarter productivity climbed by 0.8%, which was better than expectations and revised higher from the previous estimate of +0.3%. The equity futures, which were lower heading into the release, did not change much and are still indicating a weaker opening to the trading day stateside. This comes on the heels of yesterday’s continued market selloff, which saw the S&P 500 Index decline for the fourth consecutive session. The NASDAQ Composite was down in six of the last eight trading days.
The market has been spooked by renewed concerns about inflation against a backdrop of commentary from a number of the big banks that a recession in 2023 is looking more likely. Likewise, most companies are warning that earnings growth will come under pressure early next year, as the Fed’s increasingly restrictive monetary steps are likely to produce a slowdown in demand for goods and services. According to FactSet Research Systems, the consensus is calling for a slight fourth-quarter earnings decline for S&P 500 companies, with the expectation that corporate earnings will be under further stress in the first quarter of 2023.
The recent broader economic worries were reflected in the latest quarterly results from luxury homebuilder Toll Brothers (TOL). After yesterday’s closing bell, the company reported strong October-quarter results, but warned about the next few quarters, citing decreased demand for new homes, as higher mortgage rates push more buyers out of the market. The builder cited sharp declines in new orders (down 60% year over year) and in the backlog of homes under construction (-21%), both portending a significant slowdown in activity and revenue in 2023.
In general, the possibility of the Fed continuing to raise rates into a period of slowing growth is not an ideal backdrop for stocks, and the rally sparked by Fed Chairman Jerome Powell’s commentary last week at the Brookings Institute has been quickly retraced. Very few sectors have been spared from the recent spate of selling, with the biggest decliners yesterday being the economically sensitive energy, consumer discretionary, and financial stocks. With regard to the consumer discretionary sector, data are showing that consumers are buying during the current holiday shopping season, but are spending less on average, perhaps because of growing concerns about a possible recession on the horizon in 2023.
The continued widening of the inversion of the Treasury market yield curve, which occurs when the yields on short-term Treasury notes exceed those of longer-duration Treasury securities, and the drop in the price of oil, are suggesting that a recession is possible in 2023, even with the aforementioned recent positive swath of economic data, some of which of course speak of the past, not the future. The recession fears have weighed on the economically sensitive small-cap stocks in recent days. Overall, there has been a movement away from the higher-growth sectors and into more of the defensive-oriented sectors, including the utilities group, over the last four trading sessions. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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