Click Here to view today’s Global Momentum Guide The MSCI EAFE declined 0.22 percent last week, the Dow Jones Industrial Average 2.77 percent, the S&P 500 Index 3.37 percent, […]
To access this post, you must purchase Global Momentum Guide.
Author: Matthew Cowie
Market Perspective for December 11, 2022
Higher than expected producer price inflation capped off a down week for stocks.
Wall Street slid lower on Monday and Tuesday before trying a rebound mid-week, only to be hit with higher-than-expected producer price inflation. The Dow Jones Industrial Average slipped 2.77 percent, the S&P 500 Index 3.37 percent, the Nasdaq 3.99 percent and the Russell 2000 Index 5.08 percent.
Oil prices appeared set for weekly losses on recessionary concerns. Crude oil fell to $71.02 per barrel, a new 52-week low. Diesel remains elevated in price, but it too has been on a losing streak. It fell to $2.78 per gallon in the futures market, down 30 percent in a little more than one month.
Energy was the worst performing sector last week, losing more than 8 percent. Communication services and consumer discretionary each fell more than 4 percent. Utilities were the best performing sector, but still slipped 0.30 percent in an overall down week for the market.
Despite falling oil prices, producer prices climbed 0.3 percent in November. Fresh fruits and vegetables, along with rising fees at financial firms, pushed the index up more than expected. Although some analysts dismissed the reading because of what caused the higher prices, inflation is never balanced.
Next week will bring the consumer price index for November. The market consensus sees 0.4 percent headline inflation for the month and 0.3 percent core inflation. As long as core inflation meets the consensus or comes in lower, stocks should hold up well. If like the PPI, core CPI comes in hotter than forecast, selling could push the indexes lower.
Investors may hold off on taking too much action in response to the CPI though, because the Fed will disclose its plans for interest rates on Wednesday. Officials from the central bank have hinted at another 0.5 percentage point increase and futures markets have priced that hike in. Any deviation from that plan will spark volatile bullish or bearish reaction, depending on if it comes in dovish or hawkish. Chairman Powell’s press conference, along with the “dot plots” showing Federal Open Market Committee members’ expectations for the economy and rates in 2023, could also spark a market reaction. Currently, speculators and interest rates futures forecast rates will rise into September 2023, with the market split about 50/50 on whether 5 percent or 5.25 percent will be the highest rate before the Federal Reserve starts cutting.
The weekly number of U.S. jobless claims rose to 230,000 last week, up from 226,000 the previous week, the Bureau of Labor Statistics (BLS) reported Thursday. The labor market remains strong, but the four-week moving average of initial claims has been rising.
China shifted its coronavirus policy in the wake of protests. It has abandoned zero-covid and now says most of the population will be infected. Serious outbreaks will still be met with lockdowns, as will places where there are more elderly residents. It remains to be seen how quickly the country opens up though because two years of intense virus propaganda has altered consumer behavior. November trade data showed Chinese trade was weaker than forecast. Tuesday and Wednesday will see Chinese lending, industrial production and retail sales data.
iShares China Large Cap (FXI) has rallied about 33 percent over the past six weeks and lifted emerging market funds with it. The rally has also helped global equities as investors hope for faster growth from China. If the U.S. inflation data and Fed meetings are in line with expectations, its possible the Chinese data be more impactful on markets this week.
Earnings for the upcoming week:
• Monday: Oracle Corp
• Thursday: Adobe Inc.: Q4 2022 Earnings
• Friday: Accenture plc: Q1 2023 Earnings
ETF Momentum Movers in November
Global X Copper Miners (COPX) +38
iShares Silver Trust (SLV) +28
VanEck Steel (SLX) +27
VanEck Gaming (BJK) +26
SPDR Basic Materials (XLB) +26
The month of November saw materials stocks lead the market higher. SPDR Materials (XLB) gained 13 percent in December 2, more than double the 5.5 percent rise in SPDR S&P 500 (SPY). Sectors such as copper and steel rallied as well, but oil, palladium and agricultural commodities were among the largest momentum losers. What explains this divergence?
In one word: China. Although one can look at the above funds and maybe guess China was the driver, the presence of VanEck Gaming (BJK) gives it away. Gaming stocks in that portfolio are heavily influenced by Chinese gamblers. As for the commodities, copper and steel are two of the main metals in demand when China increases stimulus spending.
The past month saw several rumors of China reopening along with large protests against lockdowns in some cities. Combined with the general rally since October, it delivered substantial gains in equities with China exposure. Invesco China Technology (CQQQ) climbed 43 percent from its October low. As a large component in emerging market funds, China and Chinese tech stocks helped emerging markets outperform U.S. markets, as did the weaker U.S. dollar.
What’s next for these sectors will be an important signal for markets and the world economy.
VanEck Steel (SLX) is the only fund ranked high enough in our relative momentum rankings to be a possible portfolio addition anytime soon. Often times, sectors come close to making into the top-10 of the rankings only to fizzle out though. Is it headed for leadership or will this be another fizzle?
Overlaying technical signals such as the 200-day moving average on the major indexes shows the markets at a major decision point. Rallies in 2022 have ended around this level. Will this be the third major reversal or has the bottom been made?
A breakout in all assets will signal this past year was more like a large correction than a bear market. At the very least, it would signal extended rallies into the end of 2022. If optimism around China remains, then the momentum indicates China-related sectors should extend their momentum gains.
If sectors such as copper, steel, industrials and emerging markets extend their rallies, it could create a bifurcated market. If these shares are doing well, it doesn’t confirm inflation will be higher. Investors will make that assumption though, and it could be why stocks such as Amazon (AMZN) are lower now than they were in October. Strong growth amid higher inflation would weigh on technology-heavy indexes such as the Nasdaq.
Finally, it’s possible history repeats. Most assets turn lower from here and resume the downward trend that has dominated 2022. In that case, it’s possible some of the above sectors underperform as traders who piled in and created the upward momentum find themselves scrambling out.
When the market finally tips its hand, the momentum rankings will tell us which sectors are primed for leadership.
Global Momentum Guide for December 5, 2022
Click Here to view today’s Global Momentum Guide The Nasdaq gained 2.09 percent last week, the Russell 2000 Index 1.27 percent, the S&P 500 Index 1.13 percent, the MSCI […]
To access this post, you must purchase Global Momentum Guide.
Market Perspective for December 4, 2022
The stock market faced a challenging Monday and Tuesday, but the three major indexes rallied hard after Federal Reserve Chairman Jerome Powell delivered a speech at the Brookings Institution. He reiterated that the pace of rate hikes would slow in December and while there was little new information, the market took the opportunity for a volatile short-squeeze that sent the major indexes up on the day. The NASDAQ led the week with a gain of 2.09 percent. The S&P 500 rose 1.13 percent. The Dow Jones Industrial Average, which has been the stronger index this year, gained 0.24 percent. It is down 5.25 percent for the year.
Apple (AAPL) fell slightly on the week, but Netflix (NFLX) and Meta (META) gained more than 10 percent each., Other BigTech stocks saw gains ranging from 1 to 6 percent.
Volatility in the U.S. stock market fell again last week, hitting levels last seen in April and August. Both prior lows in volatility saw stock market rallies lose steam and reverse. The upcoming week will be important for short-term market direction because the major indexes are also at important technical levels. The S&P 500 Index is at the 200-day moving average. A breakout higher in stocks and break down in volatility will confirm for traders that markets will likely drift higher into year-end.
The 10-year U.S. Treasury bond yield tumbled to its lowest level since September. It settled at 3.51 percent on Friday, down from the 4.30 percent peak in October. iShares 20+ Year Treasury (TLT) gained 4.32 percent last week as weaker inflation and a more dovish-sounding Fed boost bonds.
The S&P 500 gained 5.38 percent in November. All 11 sectors were green, with materials up 11.70 percent. Financials and technology rose more than 6 percent each, industrials nearly 8 percent. Consumer discretionary was the weakest, up less than 2 percent.
Job openings in the United States fell from 10.7 million in September to 10.3 million in October. New jobs were higher than expected in November, with 263,000 new hires. Wage growth was surprisingly high at 0.6 percent, double forecasts. This high rate of wage growth briefly sent stocks sharply lower and hints at how inflation be elevated longer than anticipated.
According to the Department of Labor, weekly jobless claims dropped to 225,000 from 237,000 in the week ended November 25.
The U.S. Bureau of Economic Analysis reported personal income in the United States rose 0.7 percent in October, 0.4 percent after inflation and in line with expectations.
The upcoming week is light on domestic data. The ISM services report on Monday will highlight the early week data. Friday will bring the producer price index for November along with the University of Michigan consumer sentiment survey early read on December. Analysts expect the PPI rose 0.2 percent. China’s balance of trade and inflation readings are also out this week.
Upcoming earning reports: The large-cap earning reports are few this week. The most important will be Thursday’s report from Costco:
• Monday: Gitlab (GTLB)
• Tuesday: AutoZone (AZO)
• Wednesday: Brown-Forman (BF.B)
• Thursday: Broadcom (BRCM), Costco (COST)