- US equities were lower again this week, with the S&P 500 and Nasdaq both posting their 2nd straight weekly decline
- Some of the worst performing groups on the week were also the largest year-to-date losers
- The Federal Reserve wrapped up there December meeting, raising borrowing costs by 50bp, a decrease from the previous 4-straight 75bp raises, and November’s CPI came in at 7.1 lower than estimated
- In his post meeting press conference, chairman Powell reiterated the higher-for-longer messaging, saying that the Fed still has more work to do
- There seems to be a growing dichotomy between market expectations and what the Federal Reserve is saying. Market participants are betting that there will be fewer hikes in 2023, with futures pricing in a peak fed funds rate in the 4.75%-5.0% range
- Markets are also continuing to price in 2 potential rate cuts by the end of the year, despite chairman Powell pushing back against the idea
- With the major events of the month now largely behind us, financial markets are now speeding swiftly towards holiday mode particularly as we start the week without any major macro drivers.
US equities were lower again this week, with the S&P 500 and Nasdaq both posting their 2nd straight weekly decline. Both growth and value names were broadly lower with each factor falling more than 2%. Some of the worst performing groups on the week were also the largest year-to-date losers, including Consumer Discretionary, Technology, Financials and Communication Services. Communication Services has fallen more than 40% on a year-to date basis, while Consumer Discretionary is down 35.93%, and Technology has declined 27.62%. Treasury prices were better with the curve flattening, with yields in the 2Y to 10Y range all down nearly 25bp for the week, while the 30Y was down around 30bp.
With the major events of the month now largely behind us, financial markets are now speeding swiftly towards holiday mode, particularly as we start the week without any major macro drivers. Even though there are still some features of interest, like position rebalancing into year-end, tax-loss harvesting and holiday spending data, one can imagine the next 2 weeks should be very quiet, with a lot of market participants catching up on their holiday shopping.
Equity price action has been abysmal this year, with the bumpy ride making declines feel even worse than they are. Barring nothing short of a miracle in the last 2 weeks, US stocks should close out the year in the red. As of the close on Monday, the S&P 500’s losses stand at 18.63%, while the Nasdaq has declined more than 32%, putting it on pace for the worst rout since the global financial crisis.
With the new year approaching and investors looking to put 2022 in the rearview mirror, excitement should soon be met with reality, as many of the same issues from this year should persist well into next year, including:
• Inflation that could continue to prove to be stickier than thought.
• A US economy that potentially faces a slowdown leading to a recession.
• The Fed continuing their path higher and leaving rates on hold for longer after reaching a Fed funds rate of 5.25%.
• Potential for a contraction in corporate earnings. As we wrap up what has felt like an extremely long year for investors, we wanted to offer a few interesting tidbits:
• The average up-day in 2022 has been the third-largest since 1940, trailing only 2008 and 2002.
• The average down-day has also been above-average, yet considerably smaller than the average up-day.
• The Nasdaq 100 is set for its 1st annual decline on a total-return basis since 2008, and is only the 2nd time since 2002.
• The Bloomberg Barclays Agg posted its worst year ever on record (going back to 1977) falling more than 11%.
• The S&P 500 and Nasdaq have not posted back-to-back yearly declines since the dotcom bubble when it declined 2 straight years, which was followed by a 5-year rally before the GFC took place.
FED & RATES
The 2 most significant pieces of news from now until year end was the announcement by the Federal Reserve, who pushed borrowing costs up another 50bp, paired with the release of Novembers CPI, which came in cooler than expected (7.1% vs Est 7.3%).
The 50bp hike was a downshift in pace from the previous 4-straight 75bp raises. The announcement also came with forecasts of another 75bp worth of hikes in 2023, front loaded in the beginning part of the year with one 50bp hike expected followed by two smaller hikes of 25bp.
In his post meeting press conference, chairman Powell reiterated the higher-for-longer messaging, saying that the Fed still has more work to do. He also warned that it will take substantially more evidence to give the central bank committee members confidence that inflation is on a sustained downward path. Although he did suggest that the Fed is getting closer to a more sufficient restrictive level, he did also note that all decisions would be made on a meeting-by-meeting basis, dependent on incoming data. With the Federal Reserve attempting to carefully manage their actions, there seems to be a growing dichotomy between market expectations and what the Federal Reserve is saying. Market participants are betting that there will be fewer hikes in 2023, with futures pricing in a peak Fed funds rate in the 4.75%-5.0% range. However, the Summary of Economic Projections (SEP) released by the Fed showed a median of 5.1% in 2023. Additionally, Markets are also continuing to price in 2 potential rate cuts by the end of the year, despite chairman Powell pushing back against the idea as he continually pointed to the new dot plot.
The Bloomberg World index closed the week down 2.10%, with growth down 2.57% and value down 1.72%. The dollar index edged down 0.10% as the Federal Reserve announced a 50bp rate hike and said that ongoing hikes are appropriate to fight inflation. Bank of England also raised interest rates by 50bps to 3.5%, its ninth increase this year. The British pound rallied to 1.21 per dollar on the news. Brent oil recovered last week, climbing from $76 to $79 as market participants assess the impact of the reopening of the economy in China. There is no near-term catalyst to watch as we approach the end year.
European nations agreed on capping gas prices at €180, which is lower than the original proposal from the European Commission. In the press conference dedicated to this announcement, EU Energy Commissioner Kadri Simon said this deal should help putting a lid on gas prices as the region already prepares for next winter’s challenging gas storage. The newly adopted price cap is triggered when prices stay above the ceiling for three consecutive days and the spread with global liquefied natural gas (LNG) is at least at €35. This summer, European gas prices surged more than €35 above LNG prices amid Russian sanctions. The Euro STOXX index dropped 3.18% last week, with the energy sector down 1.76%.
The European Central Bank (ECB) announced a 50bp rate hike last week, in line with expectations. Earlier, the Federal Reserve and Bank of England also opted to slow to the pace of rate hikes to 50bps to allow time for the economy to absorb the tightening of financial conditions. ECB President Christine Lagarde warned that more rate hikes of same magnitude could be appropriate as inflation remains high in the Eurozone. In fact, in November, Euro area CPI climbed 10.1% year-over-year, although a smaller increase than the 10.6% posted a month earlier. Lagarde also clarified at the monetary policy press conference that a pivot is not on the horizon. The Euro hit a six-month high versus the dollar on the news and the German two-year yields jumped by 28bps.
Securities regulators in China and Hong Kong announced that Chinese investors will soon be able to invest in international companies listed in Hong Kong. Through this deal, the government is trying to push international companies to list in Hong Kong to access to China’s capital markets. The minimum market capitalization required to qualify for a listing is HK$5 billion according to the statement released.
The presence of international companies in the Hong Kong exchange could also boost the index performance as Hong Kong-listed shares have been a global laggard over the past five years. The news came out days after US watchdog claimed it has been able to get access to Chinese ADR audits. The Hang Seng index dropped 2.26% last week.
In Japan, the yen rallied on Monday on the report that Kishida’s government could give more flexibility to Bank of Japan regarding the 2%
inflation goal. Market participants have interpreted this news as an increased probability of a hawkish pivot next year. A top government
spokesperson has since denied the report, but the yen managed to finish 0.5% stronger on Monday versus the dollar. The Japanese
currency has been the worst-performing among major currencies this year, down 15% versus the dollar. Bank of Japan policy makers will
meet this week to update their monetary policy. Economists expect no change in interest rate and yield curve control. However, half of
economists surveyed by Bloomberg see a policy tightening in 2023. The NIKKEI 225 index gained 1.34% last week.
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