All three major indexes ended down for the week. Most notably, Nasdaq lost approximately 2.8 percent as the tech stocks didn’t fare well. The S&P 500 declined 2.2 percent for the week, while the Dow Jones Industrial Average lost 1.7 percent.
Among the S&P 500 sectors, it was the consumer discretionary sector that lost the most at 3.6 percent. Perhaps this is not surprising as the year-to-date, it lost 34.8 percent. Information technology lost 2.7 percent for the week and is now down 26.6 percent year-to-date.
The energy sector gained 1.8 percent. No other sector apart from energy in S&P 500 ended the week in the green.
The Federal Reserve increased interest rates for the seventh time. This time around, the increase was half a percentage point, versus 0.75 percent we have become accustomed to. The market was spooked because the Fed officials hinted that the benchmark rate might be even higher next year. The market seemed to haven’t anticipated further hikes in the next year, which spooked it.
A disappointing US retail sales report weighed on the markets on Thursday. The report further strengthens the thought that the Fed might have future rate increases and the economy slides toward a recession. The report showed a decline of 0.6 percent in November, the largest in eleven months, and further raising concerns the thought that the economy might be sliding further into recession.
The problem doesn’t seem to be curtailed in the United States alone.
The central banks around the world in countries like Switzerland, the United Kingdom, European Union also increased the interest rates. The statement by the bank of England that the economy seems to be in a recession further weighed down on stocks globally.
The inflation for the month of November came in at 7.1 percent and remains stubbornly high. If you exclude food and energy costs, the core inflation was only 0.2 percent as compared to the previous month. This marks the slowest inflation increase since August 2021.
With the final two weeks of 2022 nearing, the focus will now shift to the earnings. According to Wall Street analysts, the S&P 500 is slated to record an average growth rate of approximately 5 percent. Even if these forecasts come true, it will be a big slowdown from the 2021 growth rate of 47.9 percent. Truth be told, the 2021 growth rate was high because of the base effect due to Covid 19 crisis. However, even when you consider the average growth rate of the last ten years, it has been around 8.5 percent.
One of the most essential reports next week will be the personal consumption expenditures price, set to be released on Friday. Any negative surprise in this number will surely give rise to more interest rates in the future. The last time this report was released, inflation rose by 5 percent in October, excluding food and energy prices. The number, however, was lower than 5.2 percent in the month before that.
According to the historical data, the next twelve months after the Fed interest rate cycle peak are positive for equity and bonds. That is why equity markets are expected to fare better once the Fed stops hiking rates. If that happens, we might see a broad market rally at the beginning of next year.
As for the numbers next week, quite a few important reports are being released. To start with, on Monday, there is the housing market index report by the National Association of Home Builders. The US bureau of economic analysis will also release the third quarter GDP estimate on Thursday. Additionally, weekly employment claims will be released on the same day.
Key Reports to Look for This Week
Housing Market Index by the National Association of Home Builders
Housing Starts, US Census Bureau
Existing Home Sales
Consumer Confidence Index
National Association of Realtors
US Bureau of Economic Analysis,
Third-quarter GDP (Estimate),
US Department of LaborWeekly Unemployment Claims,
Personal Consumption Expenditures Price Index
Durable goods, US Census Bureau
New Homes Sales, US Census Bureau
The University of Michigan Index of Consumer Sentiment