Final leg of the race

Stocks just about broke even in a mixed close yesterday in a low volume session with little news – the big drivers start today. The inverted yield curve in treasuries indicates that the bond market continues to worry about a recession, rightly so.

It’s go time. Well, here we are, on the last day of November. Some… many consider this the “holiday” season, and as such would be happy to press up against shop windows with banknotes and plastic in hand, all in preparation to make merry and ring in 2023. Wall Street typically embraces the season with verve. Money managers begin to clean up their portfolios for year end, putting off bold moves for the upcoming year. Smaller investors too tend to shy away from courageous moves, though I am not sure if it is emotional, psychological… or for spiritual reasons. All that said, daily volumes tend to be thinner and inconsistent which, in of itself, can cause some volatility. The good news is that the mood on the street is generally positive, based on history… which I would like to believe is spiritual. It’s true, December is on average the winningest month of the year for stocks with the S&P500 gaining 73% of the time. And there are the holiday parties (fill in a mental picture from your own memories here). Those get-togethers have been… well, different since the pandemic and WFH, but are likely to take on more of a pre-pandemic look this year, if NYC people traffic is any indicator that the world is bristling for pre-pandemic normalcy.

Unfortunately, for the markets, that pre-pandemic normalcy may not come true. December is looking more and more like it will be an inflection point. In other words, things can go either way in a BIG way. Of course, the Fed has something to do with that. It has been raising interest rates since March and policy makers have not exactly paced themselves, sprinting to a 4% Fed Funds rate with supersized +75 basis-point hikes which would have been laughable in years past. But change may be afoot. Some recent economic numbers suggest that the economy is slowing, and that inflation is beginning to creep lower. Those effects resulting from the Fed’s monetary tightening should cause the bankers to consider slowing down the pace of their hikes, and they said as much in the minutes from their last FOMC meeting. Markets are hopeful for a smaller hike in December’s FOMC meeting just 2 weeks from now. Fed Funds futures have factored in a +50 basis-point hike with a slim 15% chance of a +75 basis-point bump. That can be classified as possible but not probable… at least according to futures, AKA the market. Leading up to that meeting, we are due for a stream of high-profile, economic numbers which are likely to inform the Fed in its decision. Today we will get 2 employment numbers, one from ADP (Employment Change) and another detailing unfilled job openings (JOLTS). Wouldn’t you know it, we will also be getting Pending Home Sales which are expected to be some -35% lower than a year ago. If the Fed wishes to see its handy work, it should revel in that number. Finally, we will get the Beige Book, which is a report (probably with a sprightly beige cover) that details anecdotal economic conditions across the various Fed regions. This doesn’t get much fanfare, but the Fed DOES use it, and it is constructed for that very purpose. That is just an appetizer for what is in store for the remainder of the week and the beginning of December. Starting tomorrow we will get the Fed’s favorite inflation gauge (Core PCE Defaltor), and Friday we will get the monthly employment situation from the Bureau of Labor Statistics. These will set the mood in the markets for the weeks leading up to the next FOMC meeting. Of course, there will be other numbers along the way, namely the Consumer Price Index / CPI just a day before the meeting. Lastly, there will also be no lack of hawkish Fed speeches leading up to the pre-meeting black out period. That all starts with the chief himself, who will speak today at 1:30 PM Wall Street Time. Many believe that Powell is likely to give the market a hint of the proportions of next month’s rate hike.

He may… he may not, but the next few weeks are likely to be filled with lots of ups and downs as we approach that inflection point. I am sorry if you were hoping for a quiet December, just like the ones we used to know. Before you begin rifling through your recipe folder for Aunt Edna’s eggnog formula or Aunt Fanny’s latke recipe, pay attention to the markets for a few more weeks. On a final note, even though December is historically, on average, the best month for stocks, that historical gain for the S&P is +1.4%, not nearly enough to make up the -17% year to date deficit.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as tensions in China simmered down and focus returned to the Fed and interest rate policy. The S&P500 slipped by -0.16%, the Dow Jones Industrial Average gained a scant +0.01%, the Nasdaq Composite Index declined by -0.59%, and the Russell 2000 Index advanced by +0.31%. Bonds fell and 10-year Treasury Note yields gained +6 basis points to 3.74%. Cryptos added +2.46% and Bitcoin climbed by +1.63%.

NEXT UP

• ADP Employment Change (Nov) is expected to show +200k new jobs were created after last month logged a +239k gain.
• Quarterly GDP Annualized (Q3) is expected to come in at +2.8%, slightly higher than the prior estimate of +2.6%.
• MNI Chicago PMI (Nov) may have risen to 47.0 from 45.2.
• Pending Home Sales (Oct) are expected to have pulled back by -5.7% after falling by -10.2% in September.
• JOLTS Job Openings (Oct) are expected to have declined to 10.250 million from 19.717 million from the prior month.
• Fed Speakers: Bowman, Cook, and Chairman Powell
• Earnings after the closing bell: Petco, Splunk, Okta, Snowflake, Salesforce, Synopsys, Victoria’s Secret, PVH, and Five Below.