Big Week to Set Tone for Markets Amid Investor, Fed Worries

What a frenzy Federal Reserve Chairman Jerome Powell set off on Nov. 30 when he said the Fed could start to moderate the size of interest rate increases.

The rally turned a decent November performance for stocks into a pretty good month after a very strong October. And the huge gains (4.4% for the NASDAQ Composite) stoked hopes that the rally would continue through December.

Unfortunately, there's been little follow-through on that rally, quite possibly because investors and/or their computers interpreted moderating rates as meaning cutting rates or something close to that. And no one from the Fed has confirmed the idea.

And so, markets look like they'll continue to stumble and 2022 will end as the worst year for stocks since 2008. Looking to 2023 seems to be the mantra--if there isn't a recession.

So far in December, the S&P 500 index (SPX) is off 3.6%, having fallen six days out of seven since Powell's speech at the Brookings Institution in Washington, D.C. For the year, the index is off 17.5%.

The Dow Jones Industrial Average is off 3.2% for the month and down 7.9% for the year. The Nasdaq has stalled and has fallen slid 4%. The index is down 29.7% so far in 2022.

There's no time to relax, however. Two key economic events may pressure financial markets more this week.

• The Bureau of Labor Statistics' Consumer Price Index report is due Tuesday. The consensus estimate is for prices to have risen about 7.3% in November from a year earlier. That would be a slight improvement over October's 7.7% year-over-year increase but way beyond what the Fed wants: inflation humming along at 2% a year.
• The Fed's Wednesday announcement on interest rates. The Fed is expected to boost its key federal funds rate by 0.5% to 4.25%-4.5%. Traders will peruse the statement and the graphical report on where Fed officials see a number of indicators headed next year. Powell's news conference after the announcement will offer more hints on the potential length of the inflation fight.

It is, in fact, a busy week for U.S. economic reports and earnings. On Thursday, the government reports on jobless claims and retail sales.

Meanwhile, Oracle (NYSE:ORCL) on Monday, homebuilder Lennar (NYSE:LEN) on Wednesday, and Olive Garden parent Darden Restaurants (NYSE:DRI) on Friday are among the top earnings reports for the week.

The Raging Question for More Than a Year

The Fed's campaign to bring inflation down has been top-of-mind for investors since November 2021, when the Fed announced inflation was unacceptably high and needed to be reined in. The Fed has raised its fed funds rate five times this year. The last four have been for 0.75% each. Still, continued worries linger and produced Friday's market slump.

Unclear now is how the number of rate increases to come. The most likely scenario seems to be for another half-point bump at the Fed's February meeting, bringing the Fed funds rate to 4.75%-5%. And then waiting to see what happens. The fed funds rate is what the Fed wants member banks to pay for overnight loans.

Wharton School economist Jeremy Siegel thinks the rate increase Wednesday and the half-point increase in February will suffice. His fear, which he has been voicing loudly, is that the Fed will raise rates too much and cause too much economic damage.

PPI Report Hits Stocks on Friday

The waiting for Wednesday play on markets on Friday. The Dow Jones Industrial Average fell 305 points, with most of the loss coming in the last trading hour. The selling was prompted by another bad inflation report. The government's Producer Price Index report said prices were up 7.4% over a year earlier, more than expected, and raised worries about this week's reports.

The recession worries voiced by Siegel and others are real.

• Interest rates are inverted, with the 2-year Treasury note yielding about 4.34% on Friday while the 10-year Treasury yield finished at 3.59%. History says an inversion is a strong signal that near-term financial conditions are shaky and a recession is coming.
• Real estate activity is slowing, a direct effect of rising U.S. mortgage rates. Overall rates on 30-year mortgages jumped from 3.1% a year ago to as high as 7.1% in November, according to Freddie Mac, the big U.S. supplier of mortgage capital. Though the 30-rate has come down to 6.3%, deals have fallen apart. Builders have reported increasing order cancellations and lower traffic to new houses.
• Layoffs are starting to appear, especially among big tech companies that added staff during the pandemic. Amazon.com (NASDAQ:AMZN) is laying off 10,000 workers. These include Facebook parent Meta Platforms (NASDAQ:META), 11,000; computer maker HP (NYSE:HPQ) 4,000 to 6,000; Cisco Systems (NASDAQ:CSCO), 4,000; and Google parent Alphabet (NASDAQ:GOOGL), 10,000.
• Holiday retail sales are usually described as fair to good. Amazon reduced its fourth quarter guidance in part because, as CEO Andy Jassy said, "There is obviously a lot happening in the macroeconomic environment." Executives at Nordstrom (NYSE:JWN) and Macy’s (NYSE:M) have reported signs of consumers' being careful in their shopping, for example. Lululemon Athletica (NASDAQ:LULU) shares fell 12.9% Friday after forecasting holiday revenue and earnings lower than expectations. The stock is down 54.6% on the year.
• Oil prices globally have fallen more than 40% from their June highs and are now down on the year, despite the Ukraine-Russia war. Most analysts believe the decline is due to declining demand because of inflation pressures. Chinese demand has been depressed by COVID lockdowns. Be forewarned. Prices typically rise in the spring, and increases may be large.

Here's some good news, however: The average retail price of gasoline in the United States was at $3.277 per U.S. gallon on Sunday, according to the American Automobile Association. That's down 0.24% for 2022, the first such occurrence this year.

A great many losers

The inflation worries are the biggest factor continuing to depress stocks.

At Friday's close, just 119 S&P 500 stocks were showing gains for December, led by Campbell Soup (NYSE:CPB), up 6.34%, followed by medical device maker Stryker (NYSE:SYK), up 6%; MarketAxess Holdings (NASDAQ:MKTX), operator of a trading platform focused on credit markets; biopharmaceutical giant Incyte Corporation (NASDAQ:INCY), up 5.6%; and SolarEdge Technologies (NASDAQ:SEDG), the Israel-based solar-energy company, up 5.57%.

Healthcare and utilities are the only S&P 500 sectors that have shown gains in December. But, according to The Wall Street Journal, big institutions have been heavy buyers of industrial, materials, and energy shares in October and November. The rationale, the Journal said, was that stocks in those sectors would fare better if the Fed successfully engineered a modest economic slowdown instead of a full-blown recession.

That said, the biggest loser so far this month has been the energy sector, down 9.34% this past week and 13.1% since a near-term peak on Nov. 14, reflecting the oil-price slump.

Chevron (NYSE:CVX) has fallen 8.35% so far this month, the second worst among the 30 Dow stocks after Salesforce.com (NYSE:CRM), off 18.1%. Chevron, however, is still the top Dow stock for 2022, up 43.2%. That includes a 38.8% gain in the first quarter alone as crude oil jumped 33%. A note: ExxonMobil (NYSE:XOM) is off 7% this month after a tiny November gain. Despite the tumble, Exxon is still up a whopping 69% this year.

Merck & Company (NYSE:MRK) and Amgen (NASDAQ:AMGN) are second and third among Dow stocks for the year, up 42% and 23.9%, respectively. Walt Disney (NYSE:DIS), Intel (NASDAQ:INTC), and Salesforce are the biggest laggards, down 39.7%, 45.2%, and 48.4%, respectively.

Amgen should be an active stock on Monday. Reports Sunday said the biotech giant is about to buy drug company Horizon Therapeutics (NASDAQ:HZNP). The Wall Street Journal said the deal might be worth more than $20 billion. The shares jumped 27.3% on Nov. 30. But what a wild year: down nearly 44% from Dec. 31, 2021, to $59.73 on Aug. 22 and up nearly 63% since.

Only two Dow stocks are ahead in December Procter & Gamble (NYSE:PG), up 1.2%, and Boeing (NYSE:BA), up 0.37%. Airlines are ordering new planes to get ready for expected business gains next year.

At the same time, stock valuations are still too high for many investors, especially start-up companies and companies able to go public in the last few years with promises of revenue growth and profits later.

If you're skeptical about the valuation idea, look at Tesla (NASDAQ:TSLA). It was up 3.2% on Friday. It is, however, 8% for December and down 49.17% for the year as its CEO struggles to understand his $44 billion investment in Twitter.

Meanwhile, just 21 Nasdaq-100 stocks are higher since Nov. 30 and 24 for the entire year, which explains why the index is down 29.2%.

The leaders for the month are software developers Okta (NASDAQ:OKTA), Splunk (NASDAQ:SPLK), Chinese online retailer Baidu.com (NASDAQ:BIDU), and Pinduoduo (NASDAQ:PDD), operator of a platform connecting urban consumers to farmers in China. They're up 20.8%, 12.7%, 10.5%, and 9.4%, respectively.

The losers so far this month are electric vehicle maker Lucid Group (NASDAQ:LCID), down 14.4%; retailer Lululemon, off 14.2%; online dating company Match Group (NASDAQ:MTCH), down 13.8% and cloud security company Zscaler (NASDAQ:ZS), down 12.2%.

Many investors are selling their depressed positions in myriad stocks that once were hot. The market for initial public offerings is deeply depressed. New IPO Filings in the United States are down nearly 70% this year, according to Renaissance Capital, and pricings are off more than 80%.

The Risks for Stocks

Unfortunately for the Fed, it can't control all the questions that can affect inflation. Here are some of the biggest concerns:

Market internals. The U.S. stock market fell apart this year in part because of higher rates. When the slump began, the market had become wildly overbought. More recently, averages and stock prices have routinely hit strong support and resistance levels. Perhaps the most important right now is 4,100 on the S&P 500, which the index can't get to get a pass. In addition, the index has traded above its 200-day moving average just three times since Apr. 8. Lastly, MACD readings on most major averages are giving off bearish signals, suggesting a downside turn.

Geopolitics. The biggest risk outside the United States is probably the Ukraine-Russia War, now in its 10th month with neither side much interested in settling it. Russian President Vladimir Putin keeps warning about using small nuclear weapons to crush Ukraine and make it part of Russia again. Ukraine wants to join the North Atlantic Treaty Organization, and Sweden and Finland are headed to membership. Russia's Ukraine invasion has cut oil and gas shipments to Western Europe severely, and grain exports from both Ukraine and Russia have suffered as well, boosting food prices globally.

China and Taiwan. China believes the island nation is part of its territory. The Taiwanese don't want China to rule them. Despite a cordial meeting between President Joe Biden and China President Xi Jinping on Nov. 14, there remain fears China might invade.

The Middle East. A new government in Israel will probably be hawkish about Iran, and it is not clear where Saudi Arabian and Iranian relations are headed. The issues could disrupt global energy markets.

So, yes, the Fed may be able to stop raising rates in February and wait to see what happens.

But it does not control and can't control all the levels affecting inflation at home and outside the United States. Maybe the Fed will stop raising rates in February to obtain evidence its policy is working. But it's probably best to be ready for fits and starts in markets for now. If inflation numbers come down quickly next year, markets should respond.

Disclosure: The author currently does not own any of the securities mentioned in this article.