Week in Review: December 23, 2022

December 27, 2022

Recap & Commentary

Markets ended the week relatively unchanged despite a fair degree of intra-week volatility. Investors hoping for a “Santa Claus” rally to end the year have no doubt been disappointed thus far with the metaphorical coal that the markets have delivered. Market action on Wednesday and Thursday presented a microcosm of the market’s current mindset.

On Wednesday, the S&P 500 rose 1.5% following consumer data showing an improvement in overall sentiment, along with a decline in one-year inflation expectations. Lower expectations presumably take some pressure off the Federal Reserve in terms of how aggressive it needs to be in combatting inflation.

On Thursday, the S&P 500 fell 1.4% following revised GDP data showing 3Q22 economic activity expanded at a 3.2% pace, up from the prior estimate of 2.9%.  The seemingly good news was treated as “bad” with respect to the Fed, with the idea being that faster-than-expected growth will force the Fed to maintain, or even increase, its aggressive stance towards monetary policy.

As we enter 2023, in the near term we would expect market behavior to remain like the past week’s behavior, until such time that either inflation, broader economic growth, or both, fall to a level at which the Fed feels it can begin to  curtail its inflation-fighting efforts.

Economic Commentary

November personal consumption expenditure (PCE) price index , the Fed’s preferred gauge of inflation, reinforced CPI data from the prior week showing inflation decelerating. Compared to a year ago, headline PCE slowed from 6.1% to 5.5%, while core PCE, excluding food and energy prices, slowed 0.3% to 4.7%.

Housing market activity was mixed in November as housing starts and existing home sales declined, while new home sales increased for the second consecutive month. Existing home sales fell 7.7%, the 10th straight month of declines, to their lowest level since November 2011, excluding pandemic disruptions. Housing starts edged 0.5% lower following a 2.1% decline in October. The U.S. housing market has been hit by soaring construction materials prices and mortgage rates, while home prices remain stubbornly high. Contrarily, new home sales rose 5.8% in November, beating forecasts, to the highest level in three months.

Consumer sentiment surprised on the upside in December as concerns over inflation and the economy eased. The one-year inflation outlook fell 0.5% to 4.4%, while the five-year outlook fell 0.1% to 2.9%.

Durable goods orders saw its sharpest decline since April of 2020, falling by 2.1% month-over-month. This was primarily driven by the decline in orders for transportation equipment down 6.1%. Excluding transportation, new orders edged higher 0.2% from October.

Personal spending adjusted for inflation stalled in November, the weakest performance since July, while  personal incomes continued to rise increasing 0.4% in November following 0.7% in the prior month.

Of Note

Congress passed a $1.7T spending bill to fund the government until September 30, 2023, the end of the current fiscal year. Among the many spending priorities, the bill increases defense spending by 16% to a new record of $858B.

S&P 500 -0.2%
Small Caps -0.1%
Intl. Developed 0.4%
Intl. Emerging -0.3%
Commodities -0.1%
U.S. Bond Market -1.5%
10-Year Treas. Yield 3.67%
U.S. Dollar -0.4%
WTI Oil ($/bl) $79
Gold ($/oz) $1,806

The Week Ahead

  • Pending Home Sales
  • Weekly Jobless Claims

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