December 2022 Financial Market Update
S&P 500 Notches Second Straight Monthly Gain
Now that everyone has made it through Thanksgiving and truly begun the festive season let’s take a few minutes to review. November offered a different feel for U.S. equity markets, with a seemingly calmer environment and friendly Federal Reserve comments toward the end of the month. Market bulls are somewhat jubilant about the prospects of a smaller rate hike at the December 14th Fed meeting.
For the month of November, the S&P 500 added 5.38%[i], the Nasdaq 100 tacked on 5.48%[ii], and the Dow Jones Industrial Average increased by 5.66%[iii].
Federal Reserve Rate Decision & Jobs Data
Kicking off the month on November 2nd, the Fed delivered a widely expected 75-basis-point hike, making the effective Federal Funds Rate 3.75% – 4.00% – in line with market expectations. Markets now expect a 50-basis-point[iv] hike at the December 14th meeting.
Despite Fed interest rate hikes, labor market data continues to exceed expectations. October non-farm payroll data showed a strong labor market with 284,000 jobs created, according to revised data. This was notably higher than expectations of 195,000.
November jobs data[v] also showed job gains exceeding expectations – more on that later.
Inflation & Consumer Health
October Consumer Price Index (CPI) data[vi] showed a decline to 7.7% year-over-year versus expectations for 7.9%, spurring talks of peak inflation having passed.
October Core CPI (which strips out food and energy costs) also came in below expectations at 0.3% month-over-month versus the 0.5% forecasted.
Retail sales also showed a surprise jump[vii] in October, although inflation could be causing a data skew. The consumer seemed ready, willing, and able to spend, with a jump of 1.3% month-over-month versus expectations of 1.0%.
Core retail sales (which takes out the sale of automobiles) jumped heavily, showing a 1.3% month-over-month gain versus expectations of 0.4%.
While spending looks good for consumer health, initial consumer sentiment data was disappointing, showing a reading of 54.7 versus 55.0 expected in the preliminary University of Michigan consumer sentiment data. The figure was revised higher to 56.8[viii] upon the final data release.
Fed Signals Smaller Increases
As the markets looked ahead to Thanksgiving, minutes from the last Federal Reserve meeting gave traders and economists some holiday cheer.
The minutes showed that the Fed is looking to change gears to smaller interest rate hikes “soon.” Some Fed officials, including Federal Reserve Governor Christopher Waller, say they are open to a 50-basis-point hike at the December meeting instead of the 75-point hikes that have become the recent norm.
The December Fed meeting is right around the corner on December 14th, and markets are currently favoring a 50-basis-point hike (74.7% probability) vs. a 75-basis-point hike (25.3% probability), according to the CME FedWatch Tool[ix].
Smaller increases would cause market bulls to cheer. We’ll see what happens on December 14th, and maybe a little holiday cheer will come early.
Bond Yields Fall
The widely monitored 10-Year Treasury Note Yield declined in November, its first monthly decline since July. It ended the month at a yield of 3.702%. The 10-year yield continued its decline during the first two trading days of December, with its weekly close on December 2nd resting at 3.507%[x].
Shorter duration bond yields also declined in November. Lower yields look encouraging and could help to stimulate lending across real estate markets. However, the 2/10 yield curve remains inverted.
Short-term market volatility has subsided impressively, with the CBOE Volatility Index falling to levels not seen since August[xi]. When volatility falls, it translates to investor fear leaving the marketplace.
Some investors also watch the CNN Fear and Greed Index[xii] to gauge investor sentiment, which is not showing signs of investor fear in this moment.
As long-term investors, market sentiment in the short term is not a major deciding factor for most of us. However, it can be helpful for those employing dollar cost averaging techniques.
Key Technical Level
On the final trading day of November, the S&P 500 traded and closed above the widely watched 200-day moving average of around 4050. The first two days of December have seen the S&P 500 trading on both sides of this key technical level and closing above it[xiii].
The S&P 500 had not closed above its 200-day moving average since April 2022.
The 200-day moving average is calculated by taking the last 200 closing prices and dividing the total by 200. It is a widely followed metric used by many market participants.
Looking at the first few days of December, positive news abounds. December 1st featured the Core Personal Consumption Expenditures (PCE) Price Index coming in below expectations[xiv]. Core PCE is the Fed’s preferred measure of consumer inflation.
On December 2nd, the latest job report[xv] once again beat expectations. The strong labor market should help leave the door open for future Fed rate hikes, although markets expect them to be smaller.
However, what will the Fed’s terminal rate (the highest interest rates will go in this cycle) be? Some believe that the terminal rate may increase, albeit in smaller rate hike increments for an extended period.
Inflation & Fed Remains Key Theme
It is still all about inflation and the Fed. However, according to data[xvi] from FactSet, S&P 500 earnings showed 70% of S&P 500 companies reported a positive earnings per share (EPS) surprise for the third quarter, with 99% of S&P 500 companies reporting actual results.
Traders are looking ahead to the latest inflation data via the CPI release on Friday, December 13th, and the Fed Rate decision the next day on the 14th. The second week of December is sure to be a busy one!
With that said, while our team is dedicated to keeping clients informed of the most recent market developments, it’s important to remain focused on the long term amid shifting market dynamics. Remaining calm is key to reaching long term goals, and we are committed to helping clients stay invested for the long haul. If you need help or have any questions, book an appointment online.
Disclosure: Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
[i] (2022). Investing.com. S & P 500 (SPX). [Online] Available at: S&P 500 Historical Rates (SPX) – Investing.com
[ii] (2022). Investing.com. Nasdaq 100 (NDX). [Online] Available at: Nasdaq 100 Historical Rates (NDX) – Investing.com
[iii] (2022). Investing.com. Dow Jones Industrial Average (DJI). [Online] Available at: Dow Jones Industrial Average Historical Rates (DJI) – Investing.com
[iv] Schonberger, J. (2022, November 30). Finance.yahoo.com. Powell signals 0.50% rate hike in December, citing need to ‘moderate’ pace. [Online] Available at: Powell signals 0.50% increase in December, citing need to ‘moderate’ rate hikes (yahoo.com)
[v] Cox, J. (2022, December 2). Cnbc.com. Payrolls and wages blow past expectations, flying in the face of Fed rate hikes. [Online] Available at: Jobs report November 2022: Payrolls and wages blow past expectations and flying in the face of Fed rate hikes (cnbc.com)
[vi] Iacurci, G. (2022, November 11). Cnbc.com. Here’s the inflation breakdown for October 2022 – in one chart. [Online] Available at: Here’s the inflation breakdown for October 2022 — in one chart (cnbc.com)
[vii] Wallace, A. (2022, November 16). Cnn.com. Retail sales surged by 1.3% in October as consumers continue to spend despite inflation. [Online] Available at: Retail sales surged by 1.3% in October as consumers continue to spend despite inflation | CNN Business
[viii] Sherburne, M. (2022, November 23). News.umich.edu. High interest rates, stock market turmoil add to consumer worries. [Online] Available at: High interest rates, stock market turmoil add to consumer worries | University of Michigan News (umich.edu)
[ix] (2022, December). Cmegroup.com. FedWatch Tool: Target Rate Probabilities for 14 Dec. 2022 Fed Meeting. [Online] Available at: CME FedWatch Tool – CME Group
[x] (2022, December 4). Tradingview.com. CBOE 10 Yr Treasury Note Yield. [Online] Available at: TradingView Chart — TradingView
[xi] (2022, December 4). Tradingview.com. Volatility S&P 500 Index. [Online] Available at: TradingView Chart — TradingView
[xii] (2022, December 6). Cnn.com. Fear & Greed Index. [Online] Available at: Fear and Greed Index – Investor Sentiment | CNN
[xiii] (2022, December 4). Tradingview.com. S & P 500 Index. [Online] Available at: TradingView Chart — TradingView
[xiv] Cox, J. (2022, December 1). Cnbc.com. Key inflation measure that the Fed follows rose 0.2% in October, less than expected. [Online] Available at: Key inflation measure that the Fed follows rose 0.2% in October, less than expected (cnbc.com)
[xv] (2022, December 2). Bls.gov. Economic News Release: Employment Situation Summary. [Online] Available at: Employment Situation Summary – 2022 M11 Results (bls.gov)
[xvi] Butters, J. (2022, December 2). Advantage.factset.com. Earnings Insight. [Online] Available at: Microsoft Word – Earnings_Insight_120222.docx (factset.com)