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Week In Review: Santa May Come To Town [Dec. 23-22]

It was a positive first day for the Santa Claus Rally in an otherwise disappointing week for the market. Tax-loss selling efforts were likely part of this week’s losses, but sentiment overall soured because of a growing belief that 2023 earnings estimates are too high and will be subject to downward revisions in coming weeks and months as the economic environment deteriorates. The S&P 500, which touched 4,100 last Tuesday, was drawn to the 3,800 level all week, which proved to be a key support area.

Things got started on a weaker note as market participants digested a weaker-than-expected NAHB Housing Market Index report for December on Monday. Participants were also reacting to a Bloomberg report highlighting a rebalancing disposition that will presumably favor bonds in the last few weeks of the year.

To be fair, price action in the bond market this week did not corroborate that article. The 10-yr note yield rose 27 basis points to 3.75% and the 2-yr note yield rose 11 basis points to 4.31%.

Most of the action in the Treasury market was precipitated by a surprise move from the Bank of Japan (BOJ) on Tuesday. The BOJ announced a surprise tweak to its yield curve control (YCC) policy to allow the 10-yr JGB yield to move +/- 50 basis points from 0.00% versus its prior band of +/- 25 basis points as part of an effort “to improve market functioning.”

This announcement, which came in conjunction with the BOJ’s decision to leave its benchmark rate unchanged at -0.1%, also caused some upheaval for the Nikkei (-2.5%) on Tuesday and the currency market in addition to sovereign bond markets. The yen surged as much as 4.0% against the dollar.

Market participants also had to deal with some disappointing housing data before Tuesday’s open, namely an 11.2% month-over-month decline in November building permits (a leading indicator) to a seasonally adjusted annual rate of 1.342 million. Single-unit permits were flat to down in every region.

The S&P 500 dropped below 3,800, scraping 3,795 at Tuesday’s low before buyers showed up for a small rebound effort that ultimately left the main indices with modest gains.

The impetus for the reversal was the weakness itself. The major indices were in a short-term oversold position. At their lows Tuesday morning, the Nasdaq Composite and S&P 500 were down 9.7% and 7.5%, respectively, from their highs last week. That oversold posture triggered some speculative buying interest rooted in a belief that the market was due for a bounce.

Things really took off Wednesday when some well-received earnings reports from Dow component Nike (NKE) and leading transport company FedEx (FDX) triggered some decent buying interest.

Market participants also digested some better-than-expected consumer confidence data for December, which was another support factor for the broader market. That report overshadowed a weaker than expected existing home sales report for November that was released at the same time.

Unfortunately, the rebound move soured promptly on Thursday following some disappointing earnings results and commentary from Micron (MU) and CarMax (KMX), a dour Leading Economic Indicators report, and some cautious-sounding remarks from influential hedge fund manager David Tepper on the market’s prospects.

Mr. Tepper said he is leaning short the equity markets as he expects the Fed and other central banks to keep tightening and for rates to remain high for a while, making it “difficult for things to go up.” His comments resonated with market participants who recalled the hugely successful “Tepper Bottom” call he made in March 2009.

The resulting retreat was broad in nature with the major indices moving noticeably lower right out of the gate, dealing as well with rate hike concerns after the third estimate for Q3 GDP showed an upward revision to 3.2% from 2.9%. The Nasdaq, S&P 500, and Dow were down 3.7%, 2.9%, and 2.4%, respectively, at Thursday’s lows.

The S&P 500 was stuck below the 3,800 level and Tuesday’s low (3,795) for most of the session before the main indices managed to pare some of their losses in the afternoon trade. There was no specific news catalyst to account for the bounce, which appeared to be driven by some speculative bargain hunting interest following the early washout.

Friday’s session also started on a downbeat note after the November Personal Income and Spending Report showed no growth in real spending and PCE and core-PCE inflation rates that are still too high on a year-over-year basis (5.5% and 4.7%, respectively) for the Fed’s liking.

This report meshed with a Durable Goods Orders Report for November that was weaker than expected and was subsequently followed by economic data at 10:00 a.m. ET that showed new home sales were stronger than expected in November and that easing inflation pressures helped boost consumer sentiment in December.

Once again, the S&P 500 slipped below the 3,800 level, but soon found support as the new home sales and consumer sentiment data bolstered investor sentiment and spurred some bargain hunting interest. The major indices finished modestly higher on Friday, taking a positive first step during the Santa Claus rally period (last five trading days of the year plus the first two trading sessions of the new year).

Separately, the week concluded with the House passing the $1.7 trillion government funding bill after the Senate passed it, leaving it to be signed by the president early next week.

Sector performance this week overall was mixed. Six sectors finished higher and five sectors finished lower. The best performing sectors were energy (+4.4%), utilities (+1.4%), financials (+1.4%), and consumer staples (+1.0%). The weakest links this week were the consumer discretionary (-3.1%) and information technology (-2.0%) sectors, which were dragged down by their mega cap components. The Vanguard Mega Cap Growth ETF (MGK) declined 2.1% for the week.


Source: Briefing Investor


Mike Minter

As Chief Investment Officer, Mike directs the overall investment strategy, develops portfolio allocations, oversees trading and rebalancing, and conducts research and analysis. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. He has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).   Read Mike’s Profile HereRead More Articles by Mike

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