Tucker Financial Weekly Market Review: December 6, 2022

Last week put November officially in the rearview mirror with market narratives centered around generational protests in China, visibility on Fed monetary policy, and a very busy economic calendar. The S&P 500 booked a second consecutive monthly gain coming off the September lows, adding another 1% last week. Non-U.S. developed (+1.65%) and emerging (+4.7%) markets benefited from a soft USD and a 12% surge in Chinese stocks as government officials assess country wide Covid policy protests. Interest rates fell again last week with the 10yr settling back at 3.51%, well below the 4.25% level in late October while the yield curve dipped deeper into inversion territory with the 3m/10yr moving from -63bps to -83bps and the 2yr/10yr staying at -77bps.

• The WSJ added another anecdote to growth stock struggles this year, noting we haven’t seen DJIA (-5.3%) excess relative performance over the S&P 500 (-15%) and NASDAQ (-27%) to this extent in almost 90 years (1933) with index construction and P/E multiple compression and the primary culprits. Cheapness of non-U.S. equities relative to the U.S. remains at extreme levels.

• Given slowing growth forecasts and profit margin pressures, it’s no surprise we’ve seen analysts reducing 4Q and 2023 earnings estimates but reduced earnings estimates against a rally in stock prices (Oct/Nov) has taken the fwd P/E multiple from 15.2x to 17.6x since September 30.

• The peak inflation narrative and associated monetary policy indications have translated to strong equity/bond market recoveries and a declining USD while the sharp decline in longer-term interest rates and degree of yield curve inversion are signaling growth concerns in later 2023.

• Chair Powell’s speech on Wednesday validated market pricing of a 50bps hike at the December FOMC and likely another 50 bps in February. Markets are now pricing only a 9% probability for 75 bps hike in February and have similar probabilities assigned to 25 bps and 50 bps.

• The new set of FOMC voting members set for the January 31 meeting look like a dovish to moderate group with the tricky task of tackling inflation by assessing data trends across the labor market, rent inflation, wage inflation, and supply chain normalization.

• Equity market volatility ticked higher in reaction to the protests underway in China last weekend and week but comments from Xi Jinping signaled an openness to evaluating China’s zero tolerance Covid policies with any relaxation likely to be a very bumpy process.

• November payrolls of 263,000 came in well above consensus estimates of 200,000, near the high end of the range and the unemployment rate remained at 3.7%. Labor market participation declined two ticks to 62.1% and average hourly earnings (MoM 0.6% vs 0.3%) came in hot.

• The October JOLTS report showed job openings falling further than expected (10.334mm vs 10.5mm) and down notably from the prior month reading of 10.687mm.

• The October PIO report revealed YoY headline and core inflation of 6.0% vs 6.0% and 5.0% vs 5.0% alongside MoM readings of 0.3% vs 0.4% and 0.2% vs 0.3%.

• The October PIO report showed strong Personal Consumption Expenditures (0.8% vs 0.8%) and accelerating Personal Income growth of (0.7% vs 0.4%).

• November’s ISM Manufacturing Index came in slightly below forecasts and dipped into contractionary territory (49.3a vs 49.9e). S&P Global PMI declined 2.7 points to 47.7.

• The September Case-Shiller Home Price Index came in around consensus estimates for the MoM (-1.2% vs -1.2%) and YoY (10.4% vs 10.9%).

• Pending Home Sales in October fell slightly less than expected (-4.6% vs -5.0%).

• November Consumer Confidence registered 100.2 versus consensus estimate of 100.0.