Good evening,
The chop continues ahead of two significant events on the year-end calendar: the November CPI report releases Tuesday, Dec. 13, and the Federal Reserve’s final meeting in 2022 is Wednesday, Dec. 14. An expected rate decision should dictate how markets end the turbulent year. Will we see a Santa Claus rally once again?
The S&P 500 fell -1.4% on Tuesday, its 59th decline of 1% or more this year. Since 1950, the only years with more +1% declines than 2022: 1974, 2002, 2008. This fraught environment was the focus of our weekly huddle Thursday morning in New York. Here are the key takeaways:
Favor energy, cautious about Technology. Mark Newton, our Head of Technical Strategy, returned from a week of client meetings in Japan with our Head of Research, Tom Lee. While he was away, the market mostly fell, which Newton characterized as a “bit concerning” because we broke a minor uptrend from the October low. Volume and breadth have pulled back, setting up for what could be a choppy final three weeks of the year. Energy, which has been the top sector for the past two years, was one of Newton’s top picks entering 2022. (Our other research heads have generally been in agreement on this.) He remains constructive in the area even as crude prices have fallen. Here’s Newton:
- “I don’t love Technology over the next couple of months, which could be a headwind for equities overall. We are counting on healthcare to pull us through. It could be a difficult and unusual December for most people used to markets going straight up at year-end.”
- “For those trading, 3700 is the real line in the sand. Under that would give me real worry about a test and break of October lows.”
Brian Rauscher’s earnings work shows continued downside risk. Rauscher, our Head of Global Portfolio Strategy and Asset Allocation, says his work makes him more bearish than at any point this year. He has the fewest number of favorable stocks since the March 2020 lows, and his work predicts we have not yet reached maximum pessimism regarding the economy. His work also shows the S&P 500 will test the October low and go through it. Healthcare (flat on the year) is one of the few bright spots, along with staples.
“They are actually breaking out based on what I see,” Rauscher says. “To me, this is classic defensive positioning. Taken together, markets are pointing lower. It doesn’t have to be straight down. However, any strength next week would be the last chance to position for more downside. This is not a buying opportunity in my opinion. The only thing that will change my view is if CPI did fall off a cliff. I am not expecting that.”
The market remains expensive. That’s according to Adam Gould, our Head of Quantitative Research. His Reddit retail sentiment indicator has “been jumping around like a hot potato,” a high reading that could signal a market selloff next week. For investors who can identify stocks that will beat earnings, this environment is ripe for reward: Stocks that are beating have been rewarded nicely. But fewer stocks are beating. “The market overall is expensive,” Gould says. “It’s slightly less expensive than it was (in October), but it’s expensive.”
All told: Newton, Rauscher and Gould are all cautious as the year ends, with work that suggests more downside lies ahead.
Elsewhere in the World
China relaxed its COVID restrictions this week. Rumors on Monday of the pending changes sent the Hang Seng soaring 4.55% in response, while the Shanghai Composite Index closed up 1.76%. Wednesday saw Beijing release a nationwide update of its COVID policies, drastically narrowing the circumstances under which mass testing and proof of negative tests would be required. In most cases, the country also ended the use of quarantine facilities, agreeing to let those infected with mild (or no) symptoms – and their close contacts – isolate themselves in their own homes. Perhaps most importantly, Beijing explicitly prohibited local officials from blocking or locking fire escapes and building exits as a lockdown-enforcement measure.
It’s a troubling tactic that was blamed (without independent confirmation) for 10 fire fatalities in Urumqi that sparked last week’s widespread protests. Policies linked to Xi Jinping’s zero-COVID goal have been blamed for economic woes in China. Also on Wednesday, Chinese customs officials reported that exports in November fell 8.7% (versus expectations of a 2% dip.) November exports also fell beyond expectations, down 10.6% YoY vs. down 6% expected.
Western Europe’s first week with what is essentially an embargo on Russian oil began inauspiciously, with an Arctic blast from Greenland sending temperatures dipping below freezing after an unseasonably warm autumn. The frigid temperatures are boosting demand for natural gas in parts of Europe, an early test of the continent’s readiness for winter without Russian energy. Meanwhile, in what many view as an escalation of the conflict, Ukraine successfully used drones to hit bases in Ryazan and Saratov, about 100 and 300 miles (respectively) into Russian territory from the Ukrainian border.
And finally, it was the end of an era in aviation history this week. Boeing has delivered 1,574 of its 747 jets since the company built the first of this model in 1968. Now, the last one that will ever be produced has rolled off assembly lines in Seattle, set to be delivered next year to cargo and charter carrier Atlas Air Worldwide Holdings.