Market Strategy 12/05/2022
Where to from Here?
Last week’s data reminded traders and investors that sometimes bad news and good news can result in counterintuitive market activity
Key Takeaways
- Last week’s payroll data showed jobs growth remains resilient even as other economic data indicate a softening in strength suggesting that the Fed’s efforts are beginning to show that the economy is slowing and likely to dampen inflation.
- The ISM manufacturing index showed a drop below the 50 thresholds for expanding conditions.
- This week’s ISM services index will be key for showing the state of the broader economy.
- With Q3 earnings season and the jobs number moving into the rear-view mirror, investors will be focused on producer prices and the University of Michigan consumer sentiment index.
Markets showed resilience last week rebounding from a knee jerk reaction on Friday to the stronger than expected payroll numbers and the average hourly earnings rise reported for the month of November.
Cooler heads prevailed, however, with volatility to the downside fading and stateside stock indices closing mixed on the last day of the trading week. On Friday the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small-caps), the Russell 2000 (small-caps) and the NASDAQ Composite (some 40% weighted in tech and tech related stocks) closed respectively: +0.10%, -0.12%, -0.10%, +0.40%, +0.59% and -0.18%.
On the week the same indices were up respectively: 0.24%, 1.13%, 0.56%, 1.05%, 1.27%, 2.09% with stocks garnering investor support from economic data released earlier in the week that pointed to the Fed having some degree of success in slowing economic growth enough to lessen some of the worry that’s weighed on investors’ minds this year and giving spark to an appetite for stocks.
A mix of seven sectors (comprised of four cyclicals and three defensive sectors) led the S&P 500 higher last week (see page 7 of this report for details).
From October 12 through last Friday’s close the Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small-caps), the Russell 2000 (small-caps) and the NASDAQ Composite (some 40% weighted in tech and tech related stocks) have respectively advanced: 17.87%, 13.83%, 14.26%, 14.34%, 12.15% and 10.03%.
It’s important to note that notwithstanding the aforementioned gains since the October 12th low these indices remain respectively off on a year to date basis: -5.25%, -14.57%, -9.43%, -11.15%, -15.7% and -26.15%.
A quick glance under the hood of Q3 earnings season
With just five companies in the S&P 500 left to report in Q3 earnings season the benchmark’s earnings are up 3.44% on back of an 11.43% rise in revenue growth per Bloomberg data.
Six sectors have delivered positive earnings growth ranging from as little as 0.53% (consumer staples) to as much as 149.95% (energy). Earnings growth for the quarter year over year was 18.69% for the real estate sector while earnings for the Industrial sector and the consumer discretionary sector rose respectively 16.2% and 16.01%. The utilities sector posted a modest earnings gain in the period up 2.2%.
Among the five sectors posting negative earnings growth in the quarter communications services was worst -22.76%, followed by materials -16.01%, financials -15.74%, information technology -3.2% and health care -2.25%.
What’s Coming Next?
With Q3 earnings season drawing to a close and the November payroll data in the rearview mirror this week’s data is likely to find investors paying particular attention to the ISM services index, the PPI (Producer price index) and the University of Michigan gauge of consumer sentiment along with any news of course that could stir activity as the end of year 2022 bears down upon us.
Look for the week that follows this week to carry additional weight with the CPI on December 13th and the Fed’s FOMC rate decision on December 14th.
In our view, the stateside equity markets have been showing throughout the year that they want to go broadly higher in each of the interim rallies they’ve navigated even as bearish projections of possible outcomes to current challenging situations have dominated market performance this year.
However, economic data, revenue and earnings growth as well as the interim rallies throughout the course of this year have shown enough stubbornness and resilience to suggest that we are on our way “out of the woods” and that the “light at the end of the tunnel” does not appear to be an oncoming locomotive but sunlight.
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