The U.S. economy won't collapse under the "weight" of the Fed based on how these sectors perform despite inflation and oil risks

The U.S. economy won’t collapse under the “weight” of the Fed based on how these sectors perform despite inflation and oil risks

Investors are trying to read the tea leaves on a choppy U.S. stock market to gauge whether its recent rise can continue after Federal Reserve Chairman Jerome Powell sparked bullish sentiment in late November by indicating that his aggressive stock hikes interest rates could slow.

“Stock market management is telling you that the economy is not going to collapse under the weight of the Fed in the near term,” Andrew Slimmon, senior portfolio manager for equities at Morgan Stanley Investment Management, said in a phone call. . interview. “I think you’re going to get a strong year-end market.”

Slimmon pointed to the outperformance of cyclical sectors of the market including financials, industrials and materials over the past two months, saying these sectors “would be dying” if the economy and corporate earnings were on the rise. the point of collapsing.

The United States added 263,000 new jobs in November, beating a forecast of 200,000 by economists polled by The Wall Street Journal. The jobless rate remained unchanged at 3.7%, the US Bureau of Labor Statistics reported on Friday. That’s almost a minimum of half a century. Meanwhile, hourly wages rose 0.6% last month to an average of $32.82, according to the report.

The “resilience” of the labor market and the “resurgence of wage pressures” will not prevent the Fed from slowing its pace of rate hikes this month, Capital Economics said in an emailed note on Friday. Capital Economics said it still expects the central bank to cut the magnitude of its next interest rate hike in December to 50 basis points, following a series of 75 basis point increases.

“Overall, a strong labor market is good for the economy and only bad because of the Fed’s mission to stifle inflation,” Louis Navellier, chief investment officer at Navellier, said in a note. Friday.

The Fed raised its benchmark interest rate in a bid to rein in high inflation which showed signs of slowing in October based on consumer price index data. Next week, investors will get a reading of wholesale inflation for November, as measured by the producer price index. PPI data will be released on December 9.

“It’s going to be a big number,” Slimmon said.

The producer price index is determined much more by supply issues than by consumer demand, according to Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

“I think the pressures from the PPI peaked because of the drop we’ve seen in supply chain issues,” Kleintop said in a phone interview. He said he expects the upcoming PPI release to reinforce the general message from central banks that they are slowing the pace of rate hikes.

This week, investors will also be keeping a close eye on initial jobless claims data, due Dec. 8, as a leading indicator of the health of the labor market.

“We’re not off the hook,” Morgan Stanley’s Slimmon warned. Although bullish on the stock market in the near term, in part because “there’s a lot of money on the sidelines” that could help fuel a rally, he said the stock market’s inverted yield curve Treasury was cause for concern.

Reversals, when short-term Treasury yields exceed long-term rates, have historically preceded a recession.

“Yield curves are great predictors of economic downturns, but they’re not great predictors of when it will happen,” Slimmon said. His “suspicion” is that a recession could occur after the first part of 2023.

“Massive technical recovery”

Meanwhile, the S&P 500 index closed slightly lower on Friday at 4,071.70 but still posted a weekly gain of 1.1% after jumping on Nov. 30 following Powell’s remarks at the Brookings Institution. indicating that the Fed may scale back its rate hikes at its December meeting. 13-14 political meeting.

“The bears denigrated” the Powell-induced rally, saying his talk was “hawkish and did not justify the bullish market spin,” Yardeni Research said in a Dec. 1 email note. But “we think the bulls are seeing this inflation correctly.” peaked this summer and were relieved to hear Powell say the Fed might be willing to let inflation subside without pushing the economy into a recession.

As this year’s inflation crisis caused investors to focus “only on the danger, not the opportunity”, Powell signaled that it was time to examine the latter, according to Tom Lee, head of research at Fundstrat Global Advisors, in a Friday morning note. Lee had already been optimistic ahead of Powell’s speech at Brookings, detailing in a Nov. 28 memo 11 headwinds of 2022 that “tilted.”

See: Stock market could see ‘fireworks’ through year-end as headwinds ‘turned’, says Fundstrat’s Tom Lee

The S&P 500 has moved back above its 200-day moving average, which Lee pointed out in his note Friday before the market opened. He called the index’s second consecutive day of closing above this moving average a “massive technical recovery”, writing that “in the ‘crisis’ of 2022 this did not happen (see below ), so this is a model break.”


On Friday, the S&P 500 SPX,
once again closed above its 200-day moving average, which then stood at 4,046, according to FactSet data.

Navellier said in a note on Friday that the 200-day moving average was “important” to watch on that day to know if the benchmark U.S. stock market finished above or below it could ” lead to a new momentum in both directions”.

But Charles Schwab’s Kleintop says he could “put a little less weight on the technicals” in a market that’s currently more macro-focused. “Where a single word from Powell could push ‘the S&P 500 above or below the 200-day moving average,’ he said, “it may not be as much supply driven or demand for shares from individual investors”.

Kleintop said he is looking at a risk for the stock market next week: a cap on Russian oil prices that could come into effect as early as Monday. He is worried about Russia’s reaction to such a ceiling. If the country decides to withhold oil from the world market, he said, it could result in “CL.1 oil prices,
rebound” and aggravate inflationary pressures.

Lily: G-7 and Australia join EU in setting $60 a barrel price cap for Russian oil

Navellier, who said a “soft landing is still possible” if inflation falls faster than expected, also expressed concern about energy prices in his note. “One thing that could kick-start inflation would be a spike in energy prices, which is best hedged by overexposure to energy stocks,” he wrote.

“Volatility is expected to remain high,” according to Navellier, who underlined “the Fed’s determination to continue to apply the brakes.”

U.S. stocks have seen wild swings lately, with the S&P 500 climbing more than 5% last month after jumping 8% in October and slipping more than 9% in September, according to FactSet data. Major benchmarks ended mixed on Friday, but the S&P 500, Dow Jones Industrial Average DJIA,
and technology-heavy Nasdaq Composite COMP,
each rose for a second straight week.

“Keep the bias for quality earners,” Navellier said, “taking the opportunity to add setbacks.”

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