ANGLES.

The calendar may have flipped, but the song remains the same.

Last week was something of a microcosm of 2022; a steady downward grind for the most part, occasionally punctuated by a sharp spike. Last year these spikes all failed to trigger a true turnaround, always eventually fizzling out and leading to subsequent further new lows. It remains to be seen if that pattern will continue or benefit from the so-called “January Effect” (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below).

Many of the market’s big dogs stumbled right out of the gate in 2023’s opening few sessions.

* Apple (AAPL) stock got punished early in the week following a report that the company is telling suppliers to reduce production of some components because of a decline in demand.

* Microsoft (MSFT) fell hard on Wednesday as analysts downgraded the stock and cut the price target, pointing to growing weakness in the company’s Azure cloud computing and Office 365 businesses.

* Tesla (TSLA) reported far fewer vehicle deliveries than anticipated and the stock price continued its apparently relentless meltdown.

* Meta/Facebook (META) continues to get slammed and fined by European regulators for its perceived anti-privacy measures.

* Amazon (AMZN) announced it was being forced to lay off more than 18,000 employees, a larger total than anticipated and the most in the company's history.

* Walgreens/Boots (WBA) shares sank more than 6% on Thursday as the largest US pharmacy chain posted a quarterly loss after taking a $5.2 billion charge to pay for opioid-related claims and litigation.

Analysts searched in vain through the minutes of the last Fed meeting that were released on Wednesday for a sign that indicated that committee members have any plans to ease up on their inflation-busting crusade anytime soon. They found, to their disappointment, that everyone was largely consistent with Chair Jerome Powell's public hawkish rhetoric, apparently unanimous in their view that there will be no interest rate cuts this year.

On Friday we learned from the Jobs Report that the US economy gained 223k jobs last month, more than the 200k economists had anticipated after a rise of 256k in November. The unemployment rate unexpectedly fell to 3.5% compared to forecasts of an unchanged 3.7%.

This evidence of a continued tight labor market seems on the surface to undermine recent encouraging inflation indicators and it initially increased expectations for a 0.50% hike in February and a Terminal Rate (the rate in place at the time that the Fed eventually stops hiking) above 5%.

But the data also showed that the rise in wage growth, average hourly earnings, eased meaningfully last month, suggesting that inflation is slowing and the market chose to focus on this side of things, resulting in stocks roaring higher to end the week, flipping the indexes from a losing week to a winning one.

Last summer, I identified what I believe to be the three most important keys to stock prices bottoming out. As 2023 kicks off, it seems like a good time to check in and see where we stand with them all.

#1. Inflation Tops Out and Declines and We Get to Peak Fed Hawkishness**

By far the most important one and the one with the most moving parts. How we’ll know: the Core Consumer Price Index (CPI) and the Core Personal Consumption Expenditures (PCE) Price Index begin to meaningfully decline. If year-on-year CPI can get back down near 3%-5% within the first several months of 2023, that will likely lead the Fed to a position of peak hawkishness whereby the interest rate hikes stop which could help to form a sustainable bottom in stock prices.

The latest: The market is telling us, via fed fund futures trading, that it simply doesn’t believe the Fed and that it thinks that peak Fed hawkishness will occur sometime before mid-2023 and that it will be forced to pivot to actually lowering interest rates sooner rather than later. The Fed is resisting this narrative and has denied that its hawkish stance is necessarily close to an end or that interest rate cuts will happen in 2023.

We will see who is right. Headline inflation has likely topped out, but we need to see a continued decline in all the inflation metrics (especially service sector inflation) and a labor market deterioration (increased unemployment) to make the market’s case over the Fed’s.

** “Hawkishness” meaning favoring the aggressive prioritization of bringing down inflation by means of continuously raising interest rates

#2: Chinese Lockdowns Ease and Growth Recovers

How we’ll know: China COVID cases drop, the abandonment of Zero-COVID measures is maintained, its currency moves back towards 6.50 to the dollar and economic growth approaches pre-COVID levels.

The latest: There has been material progress towards achieving this key over the past several weeks, as the authorities have clearly abandoned “Zero-COVID” and are openly stepping up efforts to bolster economic growth. However, the inevitable massive spike in COVID cases is causing Chinese citizens to choose to restrict their movements and holding economic growth way below pre-COVID levels. The process is, however, ongoing and this key could well be achieved during the first half of 2023.

#3: Geopolitical Tensions Decline

How we’ll know: Oil and other commodities will drop to pre-Ukraine war levels. Update: It’s a strange one. Global commodity prices have indeed fallen (some quite hard) but these price declines have most definitely not been the result of reduced geopolitical tensions, but rather as the result of the perceived rising odds of a global recession and the accompanying demand destruction. Regarding geopolitics, fighting rages on in Ukraine with no near-term end in sight. However, there is talk of a UN organized summit in February that would be aimed at establishing at least a ceasefire, although it’s too early to get optimistic about that.

While it can be said that progress has been made on all three of these key indicators and we are in better shape than when I first started discussing them, we probably need them all to be satisfied to be able to call that the bottom may be in. We continue to play the waiting game.

OTHER NEWS

How’s that whole HODL thing working out? .. Bed, Bath and Beyond (BBBY) was a one-time favorite of the Reddit meme stock army of now mostly-former novice day traders (the majority of whom probably have lower net worths now than they did in 2019) who deluded themselves into thinking that they knew what they were doing in 2021. The company announced last week that it is preparing to file for bankruptcy and the stock promptly fell 30% on Thursday and then another 20% on Friday and is now down almost 99% from its all-time high. Yet again, gullible retail HODLers are left holding the bag and institutional Wall Street wins for the umpteenth time.

UK politics; “Look at us, we’re crazy!”, US politics; “Hold my beer,” .. The mindless s**t-show in the House of Representatives last week is quite properly being disregarded by financial markets at the moment as unimportant noise, but it is a clear and ominous warning that severe political dysfunction could well inject volatility into asset markets at some point later this year. This risk is amplified by the presence of some elected members who seem prepared to just burn the whole thing down, come what may. At a minimum, another nasty debt ceiling showdown sometime in the next twelve months should surprise no-one.

UNDER THE HOOD:

While the technical evidence still points to a further decline to new lows for the market in general, there is one technical effect happening right now that may give cause for optimism.

Longer term readers may recall that, throughout 2021, while the major indexes were rising in almost a straight line upward, this report was among those which pointed out that in fact the entire universe of US stocks had topped out as early as early March of that year. The majority of stocks were in distinct, even substantial, downtrends for the rest of the year while the h…

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To reiterate what I said last week, the absolutely key question when it comes to financial markets in 2023 is: Will inflation fall faster than economic growth and earnings?

Mark your calendars for when we will get the next hints at an answer ..

* Thursday, January 12th when the US Consumer Price Index (CPI) measure of retail inflation is released. Why It’s Important: The key for the next CPI report (and every CPI report in 2023) is solid evidence of continued downward momentum in inflation. Specifically, the headline CPI number turning negative month-over-month (down from the 0.1% increase last month) and the year-over-year reading falling below last month’s 7.1%. Even more important than headline CPI, however, is the Core CPI reading as it give us a better view of service sector inflation. Markets will want to see tangible declines from the 0.2% month-over-month and 6.0% year-over-year increases that we saw for November. If we see this hoped-for trajectory, stocks could definitely begin to pick themselves up off the floor. A failure on the part of the CPI data to come through with these improvements, however, could be very damaging indeed.

* Friday, January 13th through Friday, January 27th which is the meat of the Q4 2022 earnings season.Why It’s Important: One of the main reasons stocks dropped in December was the growing concern about the likely state of corporate earnings in 2023. If the general tendency of Q4 earnings is disappointing, that will begin to weigh heavily on stocks. Conversely, if earnings are more resilient than currently feared, then that will be an early positive catalyst.

Bottom Line: Markets enter 2023 at an important transition point. One path is paved with continued disinflation, resilient earnings, gently moderating growth, a more balanced labor market with higher unemployment and rising stock and bond prices. The other path is paved with sticky inflation, rapidly slowing growth, a continued tight labor market with low unemployment and continually falling stock and bond prices. These two data points in January will offer important clues as to towards which path the markets are heading.

Nothing new was really added to the overall narrative during what was a low-volume trading week with a somewhat negative feel to it. Traders trickled back from the holiday break on Tuesday, with exactly the same lack of excitement for growth-focused stocks that they've had for pretty much all of 2022. Markets churned back and forth aimlessly all week.

A daily average of only around 3 billion shares changed hands on the New York Stock Exchange last week versus the year-to-date average of more than 4.6 billion. Low trading volume can exacerbate daily moves, there are just fewer traders at their desks inclined to step in and counter any trend that develops.

The final grisly scorecard for calendar year 2022 was a 19% decline for the S&P 500, its biggest pullback since 2008 and fourth worst year in its history, and a 33% decline for the NASDAQ, also its worst year since 2008. And add to that, of course, a collapse in government bond prices as yields spiked with the Fed’s aggressive interest rate hiking policy as well as the implosion of the whole crypto eco-system in a mushroom cloud of fraud and deceit.

There is an unfortunate behavioral tendency early in a calendar year that can be summed up in the expression: “things had better improve quickly or I’m out”, referring of course to clients throwing in the towel and selling out of stock positions because the turnaround does not appear imminent. This is, of course, the exact opposite of what is sensible, but many people still do it.

We are experiencing historic times in financial markets. Most investors have some kind of a combination of both stocks and bonds. The year that just ended was the most difficult for stocks since 2008 and the worst year for bonds in any of our lifetimes. Both at the same time!!

Never before in history have both stocks and bonds both fallen by double-digits in the same calendar year. That makes it a really, really bad time to sell if you don’t have to. It also makes it a really, really good time to buy stock ETFs if you have a long term horizon.

Market history is extremely clear:  Periods like this provide opportunities to help secure your long term financial future, as long as you resist the urge for short term protection at the expense of longer term gains. The actions you take at times like this determine the end-balance of money available to you in the far future to a much greater degree than the actions you take during those years when stocks are moving higher all the time (almost every year from 2009-2021 for example!). There is definitely light at the end of the tunnel but the problem is that we have no idea how long this current tunnel may be.

While we can never know where we’re going, we ought to try to understand where we are. The goal of this weekly report (and the quarterly market reviews, look out for the next one sometime this week) is to help you recognize why markets are falling at the moment, but also to show you what I believe likely needs to in place for this bear market to finally end (there is a legitimate path to a rebound in early 2023, not an easy one, but it does exist) and also to put everything in a proper long term context.

OTHER NEWS

Stock-pickers just suck .. Just in case there’s anyone left on the planet who still thinks that picking stocks is a profitable endeavor in the long term, a report in the New York Times showed that, over the last five years, not a single actively-managed mutual fund in the US beat the market regularly, using the definition that S&P Dow Jones Indices has employed for two decades.

The S&P Dow Jones team looked at all 2,132 actively-managed domestic stock mutual funds (non-index funds that have professional human fund managers picking the stocks in the fund) that had been operating for at least twelve months as of June 2018, excluding very narrowly-focused sector funds and leveraged funds that, essentially, use borrowed money to magnify their returns.

The team selected the 25 percent of the funds with the best performance over the twelve months through June 2018. Then the analysts asked how many of those funds remained in the top quarter for the four succeeding twelve-month periods through June 2022.

The answer was none.

Not a single one of the actively-managed funds in the US managed to achieve top-quartile performance for five successive years. Then they did the same thing for actively-managed fixed income funds and came up with the same result: zero. Not a single bond fund was in the top quarter when it came to performance for five 12-month periods.

The inevitable conclusion: those fund managers who did make it into the top quartile from time-to-time simply got lucky for a year or two. They benefited from unsustainably good fortune for a while - and it always ran out. If it was down to skill, then why did it never, ever persist?

Then the researchers used a far easier test with a much lower bar. How many funds ended up in the top 50 percent all five years? How many simply did better the median for five years in a row?

For those 2,132 funds, the answer was .. a dismal one percent!

Consider a school with 210 students in a class. Not all the high performers will always score in the top 25 percent of their class every single year for five years, but you’d expect that at least some would. And if only two kids in the whole class showed above-average performance every year for five years, I’d begin to think that there was something seriously wrong at the school.

Growth vs.Value is not even a debate right now, with little sign of change .. Tesla’s price meltdown (it cratered almost 70% in 2022) has pushed it out of the top ten US companies by market value. As of last week it was in 16th place and dropping further down the charts like a stone.

The stock’s collapse continues to infect the whole high growth / tech / communications sector which…

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The much-anticipated Santa Claus Rally window came and went last week with only more volatility and a lot of lower prices to show for it. With hardly any discernable meaningful catalysts and a lot of end of year tax-loss selling going on, there simply wasn’t much to stop stocks from rolling over early in the week. Wednesday (good) and Thursday (bad) basically cancelled each other out. Friday was a moderately decent low-volume snooze-fest.

As we begin the transition that I highlighted last week (investors shifting to taking note of what data actually shows about inflation and the economy, as opposed to exclusively caring only about how the Fed might react) we are frequently experiencing conflicts when it comes to an assessment of what we are actually looking at.

For example, the Fed’s most beloved set of indicators, the Core Personal Consumption Expenditures (PCE) last week showed its particular version of inflation (ex- food and energy prices) as moving 0.2% higher from October to November and up by 4.7% from a year ago. This showed inflation decelerating more than expected. Good news, right?

Well, yes, but it also showed that over the same period, Americans’ spending slowed substantially, up just 0.1% - a stat that just weeks ago would have fit the “bad news is good news” narrative and taken as evidence that the Fed could react to that by easing up on interest rate hikes. Nowadays it is being seen for what it really is; evidence that the pace of consumer spending is falling and could soon be in a tailspin. Newsflash: that isn’t good for stocks.

The report also showed that earnings for the average American were up 0.4% month over month, exceeding the rate of inflation, muddling the message even further.  

I’m not trying to imply that Fed rhetoric or policy doesn’t matter, it absolutely still does. But as we enter 2023, it’s no longer going to be the single most important factor for this simple reason: The Fed will have to react to the data just like it did in 2022. And if inflation and growth both fall fast enough, then the Federal Open Market Committee (FOMC) will definitely stop tightening, whatever they may say in speeches and press conferences.

But inflation data has to fall faster than economic data, otherwise we’re looking at stagflation and a potential huge Fed policy mistake. Thursday and Friday’s data implied that the opposite is happening right now; growth estimates are falling faster than inflation. And the bond market is screaming the imminent arrival of a recession by means of the persistently inverted yield curve (see EXPLAINER: FINANCIAL TERM OF THE WEEK below).

The good news (for the Fed, at least) is that interest rate hikes are totally wrecking the real estate market - as emphasized by the continued, worse-than-expected decline in housing metrics released last week, including sales of existing homes slumping 7.7% from October to November, the tenth consecutive month of declines and now down more than 35% from this time last year.

The median sales price of a house in the US fell more than 10% from June to November to $370,700. Building permit applications for privately-owned housing units crashed 11.2% over the course of the last month and are now over 22% below the level of a year ago.

All this shows just how much the vastly increased cost of borrowing has utterly destroyed demand and sentiment among both homebuyers and homebuilders. But the Fed wants to see this interest rate-related demand destruction move beyond just housing. At some point it likely will, and that's why the worries about an upcoming recession are so widespread and continue to cast a shadow over stock prices. 

This has been a year in which all the world's major central banks engineered a serious pivot toward higher interest rates and tighter money. Almost all, that is. Until last Tuesday, the Bank of Japan (BOJ) stood out as the exception to the rule.

In a surprise move and a sign that the war on inflation is now truly a worldwide affair, it “loosened its yield curve control" which is a central bank-y way of saying it will allow market interest rates to drift higher before it intervenes to cap out any rise. That tolerance cap for the ten year bond went up from 0.25% to 0.50%.

It may not look like like much, but it’s a pretty epic policy shift from the BOJ, which has been supporting easy money for many, many years. And despite recent calls from Japanese government officials to raise rates, it has refused to budge until now.

This move raises the value of the yen at the expense of the US dollar. Corporate America has been crying out for a fall in the value of the US currency, which has soared since early 2021, to help with exports - so the effect of the BOJ’s actions could even be a net positive for US stocks.

Last week I identified the two key questions that will dominate the assessment of stock market direction in early 2023 as being:

1) How fast will inflation decline?

2) How bad will the economy get?

This week I want to show more precisely what we need to see (and when) to answer those questions properly.

* The Core Consumer Price Index (CPI) measure of retail inflation (most recently up 0.2% month-on-month, 6.0% year-on-year) is the important one as it will tell us more clearly when services inflation is declining (as opposed to just goods and commodities) and it’s that decline that ultimately leads to a Fed policy pivot to re-start the process of actually lowering interest rates.

The Positive Answer: < 5.0% year-on-year before April. The Negative Answer: > 5.0% after April.

* Markets need to see a serious deterioration in the labor market. If the unemployment rate can rise and stay above 4% early in 2023 (currently it’s 3.7% and has remained stubbornly there or thereabouts for a good while), then that will be a clear sign that Fed rate hikes are restoring economic balance.

The Positive Answer: > 4.0% before March. The Negative Answer: < 4.0% after March.

The good news is that if both these questions are answered positively, then the bottom in stocks could well be in by the end of next quarter. On the other hand, if they’re answered negatively, then more new lows aren’t just likely, they’re almost certain.

This is my final report of 2022 .. I have often expressed the futility of looking forward using forecasts, but I am a big fan of the learning opportunities derived from looking back, so I will shortly be sending my Q4 review.

This has not been an easy year in the markets, to put it mildly. The fact that stocks now seem to be defying the traditional Santa Claus Rally is a sign that those difficulties could well continue into next year.

I do want to emphasize, however, that every single time we have had to endure a period like this in the markets, it has ultimately yielded generational buying opportunities to help longer term investors secure their financial futures and I’m very confident that this is the case this time as well.

Hopefully in 2023 and beyond, this weekly report will be a part of helping guide clients and subscribers towards that security.

OTHER NEWS

Payback is a b***h .. America’s most despicable and worst behaved bank, Wells Fargo, agreed to pay a colossal fine to settle allegations that it defrauded its customers in its fake account scandal that dates back as far as when Justin Bieber was advising you to love yourself in 2016. The settlement includes a $1.7 billion penalty, the Consumer Financial Protection Bureau (CFPB)’s largest-ever fine, and more than $2 billion in consumer restitution.

The bank is still facing further scrutiny and possible further penalties and sanctions from multiple other regulators more than six years after its astonishing illicit behavior came into public view. It deliberately assessed illegitimate fees and interest charges on loans for cars and homes so that many bank customers had their vehicles illegally repossessed while others had overdraft and other penalty fees unlawfully applied.

In any other sector, such behavior would result …

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The Transition from the primary market driver no longer being the expectations of what Fed interest rate policy will be and instead turning to tangible, evidence-based economic growth and inflation levels officially began last week with stocks trading on the back of growth and inflation perceptions rather than just reacting to Fed rhetoric like obedient lemmings.

That’s something that will likely continue and intensify moving forward into 2023, as investors search for the answers to the two key questions:

1) How fast will inflation decline?

2) How bad will the economy get?

The whole key to stock market performance in the first half of 2023 is starting to shift from whether the Terminal Rate (the prevailing interest rate on the day the Fed ends its policy of interest rate hikes) ends up being 4.9% or 5.1% or whatever, to an assessment of whether the damage to growth and earnings from these higher interest rates, wherever it is they peak, is too much for stocks to bear, or whether they can actually withstand the inevitable economic weakness that is around the corner.

Last week’s news cycle was absolutely pivotal and there’s a lot to get to, so let’s dive right in.

The Consumer Price Index (CPI) measure of retail inflation for November came out on Tuesday morning before the market opened. While the year-over-year data is useful for taking a snapshot of where we stand (it was up 7.1% annualized for November), it is less useful when it comes to trying to figure out inflation’s current trajectory as it is so heavily dependent on whatever base level is used from twelve months previously.

What is far more instructive to focus on if you are trying to assess inflation’s present glide path is the month-to-month change and that rose just 0.1% from October to November (below the expected 0.3%) after having risen 0.4% in the September to October timeframe. This was the smallest monthly increase this year. Excluding more volatile food and energy prices, the Core CPI climbed a touch less than expected at 0.2% month-to-month (up 6.0% year-on-year if you must know), down a bit from October’s reading of 0.3%.

The market’s initial reaction to this better-than-expected CPI print was to furiously buy everything, following what had been a pretty impressive gain on Monday as well. However, reality cast its inevitable shadow over proceedings later in the day as it dawned on investors that perhaps a frenzied rise of 1400 Dow points in the space of 24 hours was a slight upside over-reaction to some respectable, but not exactly spectacular, retail inflation data and the bulk of the price gains had been given up by the close.

The next day, Wednesday, was Fed Day and there was no surprise at all when a half a percent increase in interest rates was announced at 2pm ET. Everyone knew that was going to happen. What the market was really focused on was the closely-watched 2023 median dot on the Fed’s quarterly “dot-plot” chart, which shows its own expectation of the Terminal Rate. Fed Chair Jerome Powell said in late November that the median dot would be “somewhat” higher than the previous projection in September, which had been 4.6%.

Now we have a better idea of what he meant by “somewhat”. The median dot this time was at 5.1%, considerably higher than that September projection and way higher than June’s, which had been 3.8%. This was viewed as a big deal and disturbed the market, even though everyone kind of suspected that this is where the dot was going to end up (the Wall Street Journal had even said as much the day before). Sometimes, even when you know a piece of bad news is coming, it can still be something of a shock when it is confirmed.

Stock markets ended the day lower as investors digested the dot plot and Powell’s observations in his press conference that current policy is still not sufficiently restrictive and that the likelihood of any rate cuts in 2023 was remote. The market also seemed disappointed that Powell gave no tip of the hat to the previous day’s CPI report showing that inflation appears to be in decline, he chose to pretty much completely ignore that in his comments.

Six other global central banks around the world, including the European Central Bank, the Bank of England and the Swiss National Bank, also hiked interest rates in the space of 24 hours. Again, none of this was unexpected, but still weighed on sentiment nonetheless.

In a classic example of the Wall Street adage “buy the rumor, sell the fact”, what had been a steady decline late on Wednesday intensified into something of a bloodbath on Thursday and Friday, wiping out all the intense gains of Monday and Tuesday and then some, partly due to the release of Retail Sales, showing a decline of 0.6% in November, the biggest monthly fall of 2022 and one that confirmed that American consumer budgets are now (finally) under some pressure.

Interestingly, however, it seems that many traders don’t seem to fully believe the Fed’s pronouncements as futures markets still have the Terminal Rate estimate at 4.9% and below 4.5% by the end of 2023, in spite of what the dot plot showed. In further evidence of The Transition, they seem to be looking more closely at the hard data showing cooling inflation rather than listening to the Fed’s threats about what might happen.

The outcome of the next scheduled Fed meeting will be announced on February 1st, 2023 and will be heavily influenced by economic data released in the interim, particularly December CPI which will be released in January.

Going forward, the two biggest threats to stock prices are now either a resumption of higher inflation or economic growth suddenly falling off a cliff or, in the nightmare scenario, both of those at the same time (the dreaded “stagflation” that I talked about in a Weekly Report way back in October 2021).

Stay tuned.

OTHER NEWS

"One of the biggest financial frauds in American history”, U.S. Attorney Damian Williams .. So-called “financial terrorist” and ex-FTX honcho, Sam Bankman-Fried had a rough day last Tuesday, as it became clear that no-one (apart from Kevin O’Leary, it seems) appears to be buying his increasingly desperate attempts to manufacture a phony narrative of himself as a well-meaning nice guy who just got in a bit over his head.

He was finally arrested, denied bail and is now awaiting extradition from the Bahamas to the US on a number of serious civil and criminal charges relating in part to him directing the use of customers’ money to pay the expenses and debts of Alameda Research, his own affiliated hedge fund and whose CEO happened to be his now ex-girlfriend.

The SEC filed civil charges against him, alleging that he"built a house of cards on a foundation of deception" fully intending to defraud both investors and customers. The US government filed eight different criminal charges against him, ranging from securities fraud (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) to wire fraud to illegal campaign contributions to both parties, alleging that his criminal conduct started as early as 2019. The bankruptcy-imposed successor at FTX, John Ray, told Congress that what he discovered upon taking the helm was "plain, old-fashioned embezzlement". SBF faces serious jail time if convicted.

The inconvenience of being arrested torpedoed SBF’s plans to cap his frantic media-round schedule by testifying on a video link to Congress last week. Reuters obtained his prepared statement to the congressional panel and it seems that he he planned to open with the line, "I would like to start by formally stating, under oath: I fucked up". A pathetic, lame attention-seeker right to the bitter end.

Talking of which ..

As Josh Brown told us last week, we need to talk about Tesla (TSLA) .. The stock is down about 60% since the spring (including a fall of over 16% just last week alone) vs. down just 12% for the S&P 500 index of which it is a part. It is almost impossible to get your head around how large the loss of market capitalization…

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Over the past few weeks, the macro environment has generally become “less bad” and that does justify some kind of a rally, but it’s important not to confuse “less bad” conditions with actual “good” ones. It’s also important not to mis-interpret year-end seasonal factors and positioning, combined with a sudden burst of optimism, with the implication that this has sown the seeds for a sustainable rally and an end to all this volatility. We saw in full technicolor (mostly red) last week that it has not. Not yet.

When the day finally arrives when the Fed stops hiking rates, that’ll doubtless be one big negative out of the way. But the question will then become; “just how bad is the economy?” And the answer could well be along the lines of; “pretty damn bad”.

Even if the Fed stops hiking interest rates after the December or February meeting (far from a sure thing), economic growth will likely continue to roll over and corporate earnings will remain under pressure. A stagnant economy and falling earnings do not create a good environment for stocks.

In that scenario, earnings are likely to be depressed until the Fed finally pivots and starts cutting rates again to stimulate the economy in an environment where it feels inflation is at least mostly under control. Mid 2023? End of 2023? 2024? Who knows?

I’m not trying be a complete Debbie Downer here. Some good things are happening and there’s been a tangible improvement in market conditions in recent weeks - but this stuff had been aggressively priced in to stock prices already and we got an acute reminder last week that there are still plenty of major obstacles for risk assets including still-rising interest rates, slowing growth, still-high inflation and falling earnings, not to mention China COVID, the supply chain, Ukraine and the cremation of crypto.

The problem is that there's still enough good news to eventually mean more bad news. The current Catch-22 for stocks is that if the economy is too strong, it means more inflation and more Fed tightening, thereby hurting stock valuations. If the economy is too weak, it can mean lower earnings, thereby hurting stock valuations. Ending up on that narrow strip of middle ground is going to be very tricky.

The skies have most certainly not cleared yet.

Much of last week was spent playing a waiting game before next week’s avalanche of critical data (see THIS WEEK’S UPCOMING CALENDAR, below) and, as has been the case lately, when the market is awaiting something to give it a renewed sense of direction, it tends to just sink steadily lower while it waits.

US equities tumbled early in the week as a better-than-expected report on the state of the services sector raised more “good news is bad news” concerns that the strong economy will prompt the Fed to keep increasing interest rates to bring down inflation. Market interest rates jumped, tech stocks got pounded again, bond prices fell and the so-called “fear index”, the VIX (see LAST WEEK BY THE NUMBERS below) spiked 8% in a day.

There was also a consistent drumbeat of caution from major bank CEOs last week, including those of Bank of America, Goldman Sachs, Morgan Stanley and others at the Goldman Sachs Financial Services Conference, throwing micro-economic fuel onto what had previously been a mostly macro-economic-driven fire.

We learned that the rate of wholesale inflation of raw materials is broadly heading in the right direction, if a little more slowly than the Fed would ideally like. Data released last week showed the Producer Price Index (PPI) rose 0.3% in November, a little higher than expected but no higher than the month before and was up 7.4% from a year ago, easing from 8.1% year-on-year in October. Core PPI, which excludes volatile food and energy prices, also climbed 0.3% and was up 4.9% year-on-year, down from a rate of 5.4% the month before.

The market is very much on edge ahead of next week’s Consumer Price Index (CPI) retail inflation report on Tuesday morning. Any indication that prices remain elevated and that inflation is proving to be more sticky than the recent narrative has led us to believe could be very damaging.

This market narrative, that the Fed seems to have finally broken the back of inflation, had been the dominant one for the last few weeks but doubts certainly began to creep in last week and if this is just the latest example of an Emperor with no clothes like all the other false starts of 2022, things could get ugly.

The very next day comes the announcement of the Fed’s final interest rate hike of 2022, with a half a percent increase all but certain, but with the tone and nuance of Chair Jay Powell’s ensuing news conference likely to prove critical to the market’s reaction. And then the day after that, we will hear from the European Central Bank (ECB) on what they are doing with interest rates over there.

Strap in, this could be a frenzied week one way or the other.

As I constantly have to do every few weeks, I do want to emphasize that for investors with significant time horizons (15/20 years +), we are experiencing what could be a once every 10-20 years buying opportunity, regardless of any gloomy stuff you may be hearing or reading (including in this very weekly review sometimes) regarding the medium term outlook for stocks.

As I have said before, real-time market declines are always painful and possible future declines always seem scary to contemplate. But past declines never fail to look like (often missed) golden buying opportunities. And what we are going through right now will one day be a past decline. We don’t know exactly when this will be, but we do know that many people will one day look back on now and wish that they had taken greater advantage of the prevailing circumstances.

OTHER NEWS

Recession right now? I don’t think so .. I referred to “recession truthers” in last week’s report who are absolutely desperate to tell us how we are already experiencing a recession as we speak and it was another bad week for their highly flawed case. In the context of an economy that’s adding a quarter of a million jobs or more every month, we learned that over a third of the jobs which have been lost this year have been in the tech and media/communication services sectors which only employ about 3-4% of the national workforce (but which get all the self-pitying air-time in the media).

The American consumer is still spending like crazy, as evidenced by monster Black Friday spending data and we will learn more about this when the monthly retail sales number comes out this week.

None of this is remotely close to recessionary and nor is the fact that one of the most reliable signs of the arrival of an actual recession, the credit card 30-day delinquency rate, remains at barely above 2%. It’s at its lowest levels since 50 Cent was spending his time in da club in 2003 and got to close to 7% during the last proper recession in 2008.

All of which is not to say that we can’t move into a recession in 2023 or 2024 as all this data could well deteriorate quickly, just that we are not there yet.

China’s Zero-COVID policy over? .. China is lifting its most severe COVID restriction policies following an outbreak of protests against the strict controls. Lockdowns would continue but should now only apply to more targeted areas - for example, certain buildings, units or floors as opposed to whole neighborhoods or cities being shut down. Areas identified as high-risk could come out of lockdown after five days if no new cases are found. Several cities in China have endured months-long lockdowns even with only a handful of cases having been found.

People with COVID can now isolate at home rather than in state facilities if they have mild or no symptoms. They also no longer need to show tests for most venues and can travel more freely inside the country. Schools can remain open with student attendance if there's no wider campus outbreak.

The general sense is that this is all considered likely to help propel a r…

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Watching a grandfatherly, white-haired 69 year old man doing performative dance doesn’t sound like something hot-shot Wall Street traders and stock market professionals would choose to spend their time doing, but they very much are and that somewhat elderly gentleman is by far the the most important influence right now on the immediate trajectory of your net worth.

We are talking, of course, about Jerome Powell, the current Chair of the Federal Reserve, which needs financial conditions to remain tight to ensure its rate increases filter through the economy as desired: slowing demand and helping bring down inflation.

As we begin to look towards 2023, the focus of the markets will eventually turn towards the economy and earnings. But before that can occur, the Fed must finish its rate hike campaign. So for now by far the single biggest influence on stocks remains the Fed and the state of its impending rate hike crusade.

In fact, the Fed has been responsible for virtually every significant market pullback in 2022, and each time (January, May, June, August, September, October) it’s been because the Fed has signaled that interest rates will in fact rise more than the more upbeat financial markets had expected at the time.  Consequently, the looming final Fed interest rate decision of the year on December 14th will likely be the single event that determines if we get a “Santa Claus Rally” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) in stocks, or another 10%+ pullback that pushes prices back towards the 2022 lows. 

To understand the economic and market environment likely to prevail next year, you have to understand how Powell is trying to take the lead in a dance with financial markets and how, frequently, these markets don't cooperate.

Stock and bond markets are primed to see a policy pivot back toward the lowering of rates again and cheaper money around every corner and will seize on any nugget that fits this narrative.

That creates a dynamic in which every time Powell tries to add any kind of nuance to his messaging, indicating perhaps that the Fed doesn't intend to overdo things and cause more economic pain than necessary, stock and bond markets immediately rip irrationally higher in response. Did you see that?! The pivot! The pivot! The pivot is coming! Powell just said so!

In response, Fed policymakers are forced to take to stages and airwaves all over the country and give a round of speeches in which they try to dampen down the markets’ giddy exuberance.

And it is in the context of this dance that we should look at what Powell said in a speech last Wednesday; “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting." He said absolutely nothing new, nothing that the market did not already know. Yet stocks rallied hard on the market’s chosen interpretation of his speech - seemingly overlooking the fact that, moments later, he also said; “It is likely that restoring price stability will require holding policy at a restrictive level for some time.”

St. Louis Fed president James Bullard then dutifully came out with a large bucket of ice-cold water, saying that the markets are “underpricing the risk” of a possibly more-aggressive-than-expected Fed and even put the specter of a terminal interest rate (the rate at which the Fed stops raising rates) of up to 7% on the table. It is currently forecasted to be about 5%.

All this was against the backdrop of continued COVID protests in China, the aversion of a national rail strike, red-hot Black Friday spending data, the contraction of US manufacturing for the first time after 29 straight months of growth and a benign inflation reading from the Personal Consumption Expenditures Index report - all ahead of Friday’s key jobs report.

Recession truthers suffered another setback when the report came out and showed that the jobs market remains on fire. Yet another 263k jobs were added in November, way more than expected. The jobless rate remains unchanged at 3.7%.

In true “good news is bad news”-style, markets initially reacted by plummeting, fearing that their holy grail of a pivot to the lowering of rates could well be postponed by this perfect excuse for the Fed to keep up (or even intensify) its campaign of raising rates as a result of the labor market remaining so hot. A late day recovery, however, left the indexes mostly in the green for the week.

OTHER NEWS

Crypto woes, this week’s installment ..Yet another important corner of the cryptocurrency universe crumbled into non-existence in the wake of the catastrophic FTX collapse. BlockFi, backed by venture capitalist Peter Thiel (whose recent banking venture GloriFi just went out of business after only three months in existence), filed for bankruptcy on Monday.

Interestingly, Blockfi’s fourth largest creditor is actually the Securities and Exchange Commission (SEC) which is still owed a good amount of the $100m fine it imposed on the company earlier this year for regulatory filing failures and illegal sales practices. Blockfi until recently offered enticingly high yields on over $10 billion of cryptocurrency deposits to the community of crypto bros, many of whom loudly mocked the rest of us for not indulging in the practice.

According to a report published in the Wall Street Journal on Thursday, it increasingly looks like the next shoe to drop in the utter s**t-show that is crypto right now might be Tether Holdings which seems to have increasingly been lending its own coins to customers rather than selling them for hard currency upfront meaning the company may not have enough liquid assets to pay redemptions. This is starting to sound awfully familiar.

Indeed BlackRock CEO, Larry Fink, came right out at the New York Times DealBook Summit last week and said; “I actually believe most of the [crypto] companies are not going to be around.”

2022 word of the year .. The US dictionary publisher Merriam Webster announced on Monday that their 2022 word of the year is "gaslighting" or as Merriam-Webster defines it, "the act or practice of grossly misleading someone especially for one's own advantage." Interest in the term was up by 1,740% over the previous years according to searches of the online dictionary.

But its popularity among those looking up words in the online dictionary is also likely down to its somewhat complicated and sometimes vague meaning. The top definition of "gaslighting" from Merriam-Webster (inspired by the 1944 movie “Gaslight” starring Ingrid Bergman) is a form of psychological manipulation, usually over an extended period of time, that "causes the victim to question the validity of their own thoughts, perception of reality, or memories and typically leads to confusion, loss of confidence and self-esteem, uncertainty of one's emotional or mental stability, and a dependency on the perpetrator."

UNDER THE HOOD:

Wednesday afternoon’s big rally in stock prices following Powell’s comments lifted the Dow Jones Industrial Average to more than 20% up from its recent low, technically placing it back into a bull market. The S&P 500 also spiked above its long term trend line for the first time since April. However, caution is advised against reading too much into these “new bull market” clickbait headlines that you may have seen last week as a result of these relatively meaningless technical thresholds.

There continues to be a short-term divergence between the Buying Power / Selling Pressure dynamic (mostly negative in nature) and the behavior of the major price indexes (recently positive in nature) as buyers increasingly seem to be heading towards exhaustion.

Many technical readings are closely aligned with where they were at the time of a number of downward market reversals in the last year. For instance, just last August, a popular indicator was making the rounds that said since 1946, …

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It was a quiet week, so let’s take the opportunity to zoom out a bit, look at the bigger picture and see where we stand in the ongoing saga of this bear market ..

There wasn’t too much to take from a choppy, vacation-shortened week with increasingly thin attendance and extremely low volume (see EXPLAINER: FINANCIAL TERM OF THE WEEK as well as UNDER THE HOOD below) ahead of and right after the Thanksgiving holiday.

We got the minutes from the last Fed meeting earlier this month which raised interest rates by 0.75% and they clearly showed that a substantial majority of those present judged that a slowing in the pace of rate increases “would likely soon be appropriate” and it was noted that some participants expressed concerns about the potential negative impacts on the financial system if the Fed continued to pursue its aggressive rate-hiking policy at the current high-octane pace.

This appeared to confirm the momentum that seems to be building among investors that the Fed will indeed slow the pace of tightening as soon as at its next meeting in early December and is now not far from its terminal rate (the Fed Funds rate on the day that they announce the end to interest rate increases).

We also saw some strong quarterly earnings reports from retailers. Best Buy (BBY) posted solid Q3 results and raised its 2022 final sales projection. Dick’s Sporting Goods (DKS), Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO) also gave upbeat outlooks.

What the market needs to see is slowing but not collapsing economic growth and a tangible downward shift in inflation and that is a nice segue to a quick review of our ongoing Three Keys To A Market Bottom.

* Key #1: Inflation clearly peaks and then declines and the Fed openly pulls back from its current hawkish stance. This is by far the most important key of all when it comes to finding a bottom to this bear market. If inflation can get back down into the 3%-5% area, that will probably make the Fed back off the hawkish rhetoric, likely resulting in a sustainable bottom in stocks. Based on the most recent data, inflation does now appear to have peaked in the US and that obviously needed to happen before we can hope for progress on the remaining two fronts (meaningfully declining inflation and peak Fed hawkishness) although neither of those appear that imminent. Where are we now? A step in the right direction, but a lot further to go.

* Key #2: Chinese lockdowns ease and growth resumes. Over the past few weeks Chinese officials have signaled there will be substantive changes to COVID policies, including more targeted lockdowns that don’t paralyze entire cities, shorter quarantine times for international travelers and the importation of proper COVID vaccines, among others. While we are not expecting to hear an explicit declaration that China will abandon its Zero-COVID policy, a process of moving away from that policy has clearly begun. It will, however, take a good amount of time for the Chinese economy to return to a pre-COVID normal. Where are we now? Notwithstanding some reported outbreaks and sporadic lockdowns last week, movement towards this goal is definitely under way.

* Key #3: Geopolitical tensions decline. Positively, global commodity prices have fallen - but these declines haven’t been the result of reduced geopolitical tensions. Instead, it’s been the result of the commodities markets pricing in the rising chances of a global recession. Regarding geopolitics, we have seen some progress over the past month, in spite of the Poland rocket story. “Diplomatic chatter” about working to find a ceasefire has definitively increased over the past weeks, with Russian, Ukrainian and US officials all making guardedly positive comments about potential talks, which is noticeable improvement over the situation a while back, when there appeared to be no chance that would materialize. Where are we now? More hopeful than for a very long time, although it should be emphasized that nothing has actually happened yet.

The overall macro takeaway from these Three Keys is net positive in terms of the direction in which things are going but less so, perhaps, when it comes to the pace of progress. There’s still an awful lot of work to do, but the last time we took a hard look at these keys in late summer/early fall, the outlook was far more dismal on all fronts.

There’s still an ongoing drumbeat of other factors in the background, of course. Not least the ongoing and increasingly jaw-dropping story of the collapse of the FTX crypto exchange.

Last week we learned from FTX’s own lawyer that a “substantial amount” of the company’s assets is “missing”, very possibly stolen. He said that FTX had been under the control of “inexperienced and unsophisticated individuals, some or all of whom were compromised individuals” - clearly pointing the finger squarely at Sam Bankman-Fried, the former man-crush of crypto bros everywhere, now cowering in his luxury apartment in the Bahamas awaiting the inevitable and long overdue knock on the door from the authorities. The trademark scruffy t-shirts and ripped jeans could well be replaced soon by an orange jump suit.

Venture capital firm Sequoia Capital came out and apologized to investors for its $150 million loss on FTX and vowed to “improve its due diligence” before making such risky investments in the future. Now there’s a revolutionary idea!

As the terrific Jason Zweig of the Wall Street Journal put it;

“In good times, when markets are booming, taking stupid risks doesn't stop you from getting rich quick; if anything, it can even help. But if you want to get rich slowly and stay rich reliably, you have to learn to avoid taking stupid risks.

That's what down markets are for. They don't just separate people from their money. They also separate people into those who learn from mistakes and those who don't.”

OTHER NEWS

US retirement balances lower .. A study from Fidelity found the average 401(k) balance fell to $97,200 in Q3, down 6% from the prior quarter and 23% lower than a year ago. The average 403b balance was 6% lower than it was at the end of June and 21% lower year-over-year. The average IRA balance was $101,900, an 8% drop from Q2 and a 25% decline from 2021.

Now investors are pulling out of the housing market as well.. Investor buying of homes crashed by 30% in Q3, a sign that the toxic combination of the rise in interest rates and high home prices that pushed traditional buyers to the sidelines are causing these investment firms to pull back, too. Companies bought around 66k homes in 40 tracked markets during Q3, compared with 94k homes during the same quarter a year ago. This is the largest quarterly decline in investor purchases since the sub-prime crisis of 2007/2008, other the freak second quarter of 2020 when the pandemic shut down most home buying. 

Just a few months ago, these firms were buying homes in record numbers, helping to supercharge the housing market. Now, investors are reducing their buying activity in line with the decline in overall home sales.

Recession in earnings? Not so much .. Company executives may be talking about recession risks a lot these days. But if you look at what they're actually doing, things look a little different. The nation's biggest firms reported record capital expenditure (investments in buildings, new machinery or technology).

But company borrowing has slowed on the back of higher interest rates, which suggests that while companies continue to invest at a brisk pace, they might not be borrowing as much to do so. Rather, they are relying on booming profits built up in recent years.

So while whether or not the economy will fall into recession at some point may remain up for debate, there is clearly no recession right now in company earnings. Cash flow levels are very healthy.

UNDER THE HOOD:

We are now witnessing a significant divergence between the macro-economic and conventional messaging (see above) and the under the hood market technicals.…

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Apologies once again for last week’s report, or the lack of it. I am safely back in the US now and very much recovered. Thanks for all the good wishes that I received, they are very much appreciated.

Towering over last week’s market activity was the extraordinary and shocking fraudulent collapse of the FTX crypto exchange. For many, this was a watershed moment where the whole crypto eco-system was finally exposed as being polluted by criminality and fraud and is sorely in need of subjecting itself to very meaningful regulation very soon if it is to have any hope of remaining viable.

The rampant lawlessness in the current version of crypto-world will only make regulated government-sponsored programs like the Digital Dollar Pilot (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) either more attractive or less attractive, depending on how you look at it. Either you think that crypto cannot continue to exist in the hands of a few often criminally-inclined unrepentant crypto bros like Do Kwon, Sam Bankman-Fried and the rest and needs to be under government control or you think the whole thing is such a s**t-show that the government shouldn’t even be touching it with a ten-foot pole.

The FTX bankruptcy overseer, John Ray, said “never in my [40 year] career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” And this is a guy who oversaw the bankruptcy of Enron!

Minneapolis Federal Reserve Bank President Neel Kashkari did not mince his words last week, calling out all cryptocurrencies as nonsense. He tweeted that the fall of FTX wasn’t just a case of one fraudulent player in a serious industry, but that the “entire notion of crypto is nonsense.” He added that crypto is not useful for payments, doesn’t provide an inflation hedge, has no scarcity value and no taxing authority. He described it as “just a tool of speculation and greater fools [a reference to the Greater Fool Theory]”

On the other hand, investors continue to see less and less risk in buying stocks. They want inflation to go down, so stocks can go up. But every time stocks go up, the Federal Reserve fears that inflation won't go down and Fed officials went out of their way last week to frantically emphasize that stock markets, giddy after the previous week’s furious rally, could be getting ahead of themselves.

* San Francisco Fed Bank President Mary Daly said any discussion about pausing interest rate hikes “is off the table” although she did then go on to say that a range of 4.75% to 5.25% is a reasonable expectation for peak interest rates, implying the current cycle is close to done.

* St. Louis Federal Reserve President James Bullard said interest rates "will need to be increased further" to become "sufficiently restrictive" in taming inflation.

* Boston Federal Reserve President Susan Collins said on CNBC that yet another 0.75% interest rate hike in December was "still on the table" .

* “It will probably be appropriate soon to move to a slower pace of increases,” Federal Reserve Vice Chair Lael Brainard told Bloomberg. “But I think what’s really important to emphasize: We’ve done a lot, but we have additional work to do.”

That's not exactly pivot-friendly language and reminds us that October’s inflation report was not a game changer, it was only a hopeful first step in the right direction.

On Tuesday, with the markets already jittery following reports that a Russian rocket had struck a Polish village, the Bureau of Labor Statistics released its measure of wholesale inflation, the Producer Price Index (PPI) for October, showing that raw material prices rose 0.2%, at the same pace as in September. The index was up 8.0% from a year ago, down from a rate of 8.4% the month before.

Retail sales jumped in October, up 1.3% after being unchanged the month before. That was the biggest advance since February. The annual gain was 8.3%. All these numbers exceeded forecasts, raising concerns of yet another green light to the Fed to keep up its aggressive monetary tightening to fight inflation.

Also unhelpful to market sentiment was the announcement that Target (TGT)‘s Q3 profits had plunged 50% and that the retailer was very concerned about sales during the key upcoming holiday season. The company blamed this on changes in consumer behavior, indicating that shoppers are increasingly being impacted by inflation, rising interest rates, and economic uncertainty.

Housing saw an eleventh straight monthly decline in builder sentiment and the ninth straight monthly fall in existing home sales as the real estate sector continues to reel from the Federal Reserve's aggressive rate hikes. Average rates on a 30-year fixed-rate mortgage have jumped from about 3% in January to over 7% currently.

So messages remain mixed, generally indicating a slowing economy but with consumers continuing to spend eagerly, only a light leveling-off in the rates of inflation and employment availability and the Fed still talking tough on interest rates. It’s difficult to see a sustainable turnaround from bear to bull while these contradictions continue to exist.

OTHER NEWS

Home prices rolling over? .. U.S. home prices could plunge as much as 20% due to a sharp rise in mortgage rates this year. Higher rates are dramatically increasing home ownership costs and “boost the odds of a severe house price correction,” according to a report from the Dallas Federal Reserve.

Dallas Fed economist Enrique Martinez-Garcia did admit that the potential for the nation’s homes to shed as much of a fifth of their value represents a “pessimistic scenario” but home prices could easily drop 15-20% under his scenario, driving down personal consumption by about 0.7%. “Such a negative wealth effect on aggregate demand would further restrain housing demand, deepening the [home] price correction and setting in motion a negative feedback loop,” Martinez-Garcia said in a release. 

“Well, this is awkward …” .. In an abrupt about-face that all but blindsided official soccer World Cup sponsor Anheuser-Busch InBev, Qatari officials suddenly reversed course on agreed policy on Friday and banned beer sales in and around the Islamic country’s eight World Cup venues just two days before the world’s biggest sporting event kicks off.

Tournament organizer FIFA once again caved in to Qatari pressure, continuing the pattern of fawning incompetence, greed and corruption that goes back to when the tiny Gulf state (it’s smaller than Connecticut) was disastrously and fraudulently awarded the tournament in 2010 (I strongly recommend watching this documentary) as a nation with zero soccer heritage with brutal legislation that oppresses women and minorities, imported slave labor to build all the stadiums (with reported deaths of migrant workers involved with the project numbering over 6,500) and has a broad ban on alcohol consumption.

Anheuser-Busch are said to be furious at what they see as FIFA’s pathetic weakness, immediately tweeting “Well, this is awkward …” (later deleted). The company has handed over $75 million to FIFA to be a primary partner and exclusive beer distributor for World Cup 2022, along with the likes of other partners like Visa, Coca-Cola and McDonalds.

FIFA expects to generate about $6.5 billion from the tournament. You can be sure lawyers are being earnestly lined up on both sides as we speak.

On the brink? .. Twitter is teetering on the edge as Elon Musk appears to be breaking the company after buying it for $44 billion last month. The self-styled “champion of free speech for all” has pushed relentlessly to put his own personal imprint on the social media service, firing the board as well as anyone else who dissents with his views, slashing the rest of the workforce by 50% without consultation (and now getting roundly sued for it) and delivering a harsh message to any remaining employees that the company needs to shape up or else he will take it into bankruptcy.

Unsurprisingly, this has …

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In a horror movie, it often happens that the poor young person being chased in the house gets right to the front door and is just about to escape onto the street when the killer suddenly jumps out and grabs them. As an audience, we are teased with the prospect of good news when, suddenly, that hope is snatched away. That’s pretty much what happened in the stock market last week, specifically with the critical aftermath of the Federal Reserve Open Market Committee meeting on Wednesday.

The market bled steadily lower early in the week amid mostly quiet news flow. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) for September showed openings of 10.7 million which was was a surprising increase from August, defying economists’ forecast for a decline. For stocks, the jolt was to the downside. Investors are currently looking for any excuse the Fed could use to pause its rate hikes. A slowing economy would be Reason Number One. But more job openings suggests the opposite - it suggests a still-strong economy that could force employers to offer higher wages to fill opened jobs. That's a recipe for more inflation, not less.

Markets continued to heavily punish the companies that fail to match earnings expectations. You can see from the market heat-map below in LAST WEEK BY THE NUMBERS who the most beaten-up victims were.

But spirits initially lifted on Wednesday when the Fed dangled some teasing “pivot-y” language with its statement announcing a 0.75% rate hike, saying that a slowdown decision could come soon and that further moves will take into account “cumulative tightening”, policy lags and additional upcoming economic data.

The stock market lapped this language up, taking it to imply a more measured response going forward, in recognition of the fact that there has been a lot of cumulative raises in interest rates already and that the lag-time involved meant that those hikes previously made could have baked in some future benefits, reducing the Fed’s need to add to them quite so enthusiastically.

Markets thought they got what they wanted from the Fed’s penultimate meeting of the year, before it was cruelly snatched away.

In the subsequent press conference, Fed chair Jerome Powell emphasized that the central bank has “a ways to go” in tightening policy enough to bring inflation down to its 2% target, and for that reason, he declared it premature to talk about pausing rate increases. “We have some ground to cover with interest rates,” he said, adding that “there’s no sense that inflation is coming down.”

He would not be drawn, despite the best efforts of the financial news hacks at the presser, on predicting the all-important Terminal Rate (the rate of the Fed Funds rate on the day that the Fed announces an end to the rate hike cycle).

He did say “I would want people to understand our commitment to getting this done, and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon,” . Scary stuff and kryptonite to stock prices.

Simply put, the message Powell sent out was that the size of future rate hikes will have no effect on when the Fed stops raising them and that these two are not particularly inter-dependent. Seeing a slowing in the extent of the rate hikes (0.50% or even 0.25% instead of 0.75%) does not necessarily indicate that the Terminal Rate (which is a far more important consideration) will be lower as a result. This distinction has now been made very clear. It sent stocks tumbling when it sunk in. The killer had just jumped onto the screen, brandishing a pretty large knife.

As investors absorbed what they had just heard, selling picked up rapidly throughout the rest of the afternoon during and after Powell’s words. The NASDAQ index, the epicenter of market valuation worries and brimming with companies that are most heavily impacted by higher interest rates, dropped over 3%. By the end of the day, the market had experienced its worst intra-day reaction to a Fed meeting since Elton John asked us all if we could feel the love tonight in 1994.

The mostly spectacular performance of equities in October suggested that the market really expected to thrown a bone by the Fed on Wednesday but was strongly disappointed. Friday’s recovery, driven by a mostly neutral jobs report which showed the unemployment rate climbing from 3.5% to 3.7%, helped to cut into the losses somewhat, but a good number of stocks (mostly in the Technology and Communication Services sector) had a rather dire week.

OTHER NEWS

And then there was one .. Remember back in the day when we all thought that an exclusive group of about six mega-tech names was driving the whole market higher? Well membership of that club is now down to just one. Even after a really bad week for the stock, Apple (AAPL) is still bigger (as measured by market capitalization) than ex-group members Meta/Facebook (META), Alphabet/Google (GOOGL) and Amazon (AMZN) combined!

Shilling for crypto .. Disgraced ex-UK prime minister Boris Johnson will address a cryptocurrency conference in Singapore next month as he forges a speaking career. Having failed to secure a second stint in the job, BoJo will be the featured keynote speaker at the International Symposium on Blockchain Advancements on December 2nd. He remains the Member of Parliament for his constituency but will skip attending Parliament in order to speak at the event. It is currently unknown how much he will be paid for his address, but he recently skipped his Parliamentary responsibilities to fly to the US to make a 30-minute speech to the Council of Insurance Agents and Brokers in Colorado for which he was paid $150k, which is close to double the annual salary of a UK Member of Parliament.

Crypto evangelists are getting more and more desperate to try and restore some kind of credibility after a long “crypto winter” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) during which prices have crashed and multiple criminal crypto frauds have been exposed, resulting in institutional and individual investors losing billions of dollars. Johnson is not the only former high-level politician speaking at the event in Singapore. He will be joined by Dick Cheney, the US vice-president from 2001 to 2009.

UNDER THE HOOD:

Despite the difficulties experienced recently by some big name stocks, broad market elements that often occur at major market bottoms, such as panic selling swiftly followed by panic buying on volume spikes, are still AWOL. In particular, volume showed no sign of spiking at or near the lows and is not increasing as it kind of needs to whenever Demand comes rushing back in.

Although some markets find their bottoms when everyone loses interest, the majority form when urgent selling pushes prices lower to the point where sellers are exhausted and buyers finally believe stocks are attractive. It is simply difficult to find evidence of this process yet.

Of the giant stocks that led the multi-year bull market into the January 2022 peak, Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), and Alphabet/Google (GOOGL) are all at or near one year lows, but a worryingly high percentage of small-cap stocks are also in the same kind of territory. With both the “generals” and the “soldiers” showing weakness and the S&P 500 now simply back to where it was in June, it is difficult to see how a bottom formation is underway.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

This week will be another busy one for investors: the U.S. midterm elections, the latest inflation data, and a continued parade of Q3 earnings reports from the likes of Disney, Dupont, Occidental Petroleum, Activision, Take-Two Interactive, NRG, Ralph Lauren, Mosaic, Tapestry and DR Horton.

Voting in the mid-terms on Tuesday will determine control of Congress for the next two years, with Republicans favored to win the House of Representatives and polling suggesting they may also wi…

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There was such a torrent of market intel to try to absorb last week that it was hard to keep up at times. It also meant that leads got buried all over the place as news and data points that would usually be the focus of market attention for a matter of days were eclipsed within hours or even minutes by yet another surprising earnings report, economic data release, geopolitical development, global interest rate change or piece of eye-popping housing market data.

Let’s try to quickly make sense of it all ..

The final outcome was sharply bifurcated market performance. In the very red corner were technology and communication services stocks, a few of whom had a rather catastrophic week, as we will discuss shortly. In the nicely green corner was pretty much everything else, which mostly moved agreeably higher over the course of the week.

There continues to be a fundamental re-pricing of the stocks of many technology-related firms, which seem to still be highly vulnerable to continued declines, while the more traditional parts of the economy, whose stocks trade at broadly lower valuations, are proving extremely resilient since the headline indexes started their latest bounce a couple of weeks ago.

The announcement on Wednesday of underwhelming earnings and forward guidance pushed Alphabet/Google (GOOGL) and Microsoft (MSFT) down intraday by 9.1% and 7.7%, respectively. Then Meta/Facebook (META) saw a quarter of its value disappear in a puff of smoke in after-hours trading following a truly hideous set of earnings and outlook, with the stock price falling to levels not seen since October 2015.

The company’s recent metaverse pivot and massive hiring spree is proving to be an absolute disaster and it is being openly said by smarter people than me that the firm appears to be basically imploding right now. It doesn’t even make the list of the top twenty most valuable US companies any more. A major investor last week wrote a scathing open letter to CEO Mark (net worth a year ago: over $140 billion, net worth last week: less than $38 billion) Zuckerberg, reflecting the concerns and suggestions of many embattled shareholders.

Amazon (AMZN) stock also crapped out, briefly falling back to below its pre-pandemic levels, despite online sales having doubled since then, after issuing some rather ugly forward guidance. Apple (AAPL)'s results stood apart from the pack by being just kind of OK. The company beat expectations on the top and bottom lines, but reported weaker-than-expected iPhone sales.

Earlier in the week, the first of three estimates of Q3 US Gross Domestic Product (GDP) indicated that the economy had expanded at a sizzling 2.6% annual rate, ending the streak of two back-to-back quarterly contractions. This was well ahead of estimates. The American consumer is just unstoppable. Personal consumption expenditures, which account for the biggest part of the economy, continue to power ahead, rising 1.4% in Q3. GDP was also lifted by exports, financial services and government spending (mainly as a result of defense spending and higher wages).

Markets also spent much of the week digesting the conclusion of the National People’s Congress in China which secured President Xi a third term as party leader and effectively made him a dictator for life. This dented emerging market returns.

A more powerful Xi likely means:

* Continued tech theft from the West

* Focus on domestic “shared prosperity,” which may be a noble social goal, but is not usually great for earnings

* A continuation of the Zero-COVID policy that has crippled China’s economic growth and contributed to the continued snarling of supply chains

* Continued geopolitical tensions with the West based on intellectual property and military movements, particularly in regards to Taiwan

Market anxiety around the recent UK fiscal debacle seemed to recede once it emerged that there were finally something resembling grown-ups in the room who are starting to clean up the mess now that the kids’ loud and crazy party is thankfully over. The markets also heaved a huge sigh of relief that Boris is now safely back in the bin. The whole bonkers episode was an unnecessary, short-term negative influence, but it didn’t change the core underlying drivers of this bear market.

While the UK may finally be putting the last few years of reckless populist nonsense into its rearview mirror, Italy appears to now be taking center stage. In one of her first pronouncements after taking office, the new Italian prime minister Giorgia Meloni openly questioned the European Central Bank (ECB)'s decision to raise interest rates to counter rampant European inflation (including Italy’s own 12% rate). The ECB declined to take any notice of her advice however, raising interest rates by 0.75% for the second time in a row on Thursday.

The situation in Ukraine continues to deteriorate. The recent decline in most commodity prices has been mistaken as being associated with some kind of easing of tensions in the war - it’s absolutely not.

Contrary to conventional wisdom or what you might hear from the clowns on FinTok, it’s perfectly possible for the situation in Ukraine to continue to worsen and commodity prices to keep falling. The reason that they are falling has nothing to do with the Ukraine conflict, it’s because of the prospect of a global demand slowdown due to a possible worldwide recession.

Last week, the Bank of Canada followed its Australian counterpart, unexpectedly slowing its pace of interest-rate hikes to “just” 0.50% compared with the consensus expectation of a 0.75% rise. It should be remembered though that central banks simply moving rates higher by a bit less than expected does not constitute the holy grail of the “pivot”, the definition of which is when the central bank clearly signals that interest rate increases will end at a specific date. We are not there yet by any means, so an over-optimistic reaction to these lighter-than-expected hikes would be ill-advised.

Housing prices make up nearly 40% of the calculation of the monthly retail Consumer Price Index (CPI) measure of inflation and while inflation pressures are well distributed throughout the economy, the biggest reason that CPI has not been meaningfully declining is because of recent buoyant home and rent prices.

On Tuesday, however, we learned that while housing prices are still up substantially on a year-over-year basis (13%), the rate of increase is falling (the previous month they were up by 15.6% annualized) at the fastest pace since the index was created in 1987.

National home prices fell almost 1% in the last thirty days alone, double the rate of the decline from the previous month. Then later in the week, we were told that new home sales fell nearly 11% from August to September and are down almost 18% year-on-year and that the average 30-year mortgage interest rate had moved above 7%, more than double where it was just a year ago. Indeed, this is the highest mortgage interest rate since Avril Lavigne asked us all why we had to go and make things so complicated in 2002.

This was all broadly viewed as positive for stocks over the longer term because these price declines and reduced demand will eventually begin to be reflected in CPI readings in the coming months and slowing inflation would signal to the Federal Reserve that its rate-hike policy is working. This could prompt the central bank to back down on additional aggressive rate hikes, thereby boosting investor sentiment and the outlook for the stock market.

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The average expected retirement age rose to 64.0 years old, up from 62.6 last year. This compares with the deemed…

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