Stocks post mixed results as conflicting economic data clouds outlook

There is in the world today a great and mysterious force that shapes the fortunes of millions of people. It is called the stock market. – Robert Wright, American journalist

In a week that was filled with conflicting economic data, the major stock averages posted mixed results as trading volumes were light ahead of Christmas. The broad-based S&P 500 Index edged slightly lower while the technology-laden Nasdaq Composite Index was the worst performer with a loss of nearly 2%. It was the third consecutive losing week for these two benchmarks. The Dow Jones Industrial Average, which is more value-oriented, bucked the trend with a gain of almost 1%. Although there was a slew of economic data released last week, the most important one came on Friday when the personal consumption expenditures (PCE) index was reported. This is the Federal Reserve’s preferred measure of inflation and it showed that the November core PCE index that excludes food and energy prices rose just 4.7% year-over-year with the smallest monthly increase since October 2021. This was good news for consumers and investors and should enable the Fed to slow the pace and size of future interest rate hikes to combat high inflation. Both the Fed and the European Central Bank (ECB) raised rates the previous week and last week the Bank of Japan (BOJ) also turned hawkish as the central bank announced possible tightening measures aimed at slowing the rate of inflation even as it left its benchmark interest rate unchanged at 0.1%. For investors, the mixed economic data last week creates a lot of confusion. On the one hand, stronger than expected economic data likely means that the Federal Reserve will have no choice but to continue to raise interest rates, which could lead to a recession. On the other hand, weak economic reports paint a picture that a recession is inevitable and will likely come sooner rather than later. Even the few notable quarterly earnings reports announced last week left investors scratching their heads. Both Nike and FedEx reported better than expected earnings but semiconductor manufacturer Micron Technology reported disappointing results as the CEO said he’s seen a dramatic drop in demand for computer chips.

Last Week

Housing data released last week was weak as November housing starts fell to a 2 ½ year low and existing home sales were weaker than expected, falling for the 10^th straight month. New home sales for November rose nearly 6% from October but were down 15% from a year ago as prices remain elevated and prospective buyers face the highest mortgage rates of the year. The National Association of Home Builders (NAHB) builder sentiment index also fell in December for the 12^th straight month. Leading economic indicators in November declined sharply as manufacturing and housing indicators all weakened, suggesting a recession could begin early next year. November durable goods orders were also weaker than expected and recorded the steepest drop since April 2020. On the bright side, the final estimate of third quarter GDP was revised higher to a 3.2% annualized growth rate from 2.9% and weekly jobless claims rose only 2,000 to 216,000, less than the estimate of 220,000. Both the December consumer confidence index and the University of Michigan consumer sentiment index were higher than expected and much higher than in November as inflation expectations improved.

For the week, the Dow Jones Industrial Average rose 0.9% to close at 33,203 while the S&P 500 Index fell 0.2% to close at 3,844. The Nasdaq Composite Index declined 1.9% to close at 10,497.

This Week

Pending home sales for November are expected to drop again for the sixth straight month and the ISM Chicago Purchasing Manager’s Index (PMI) for December is expected to rebound from its reading in November but still be below 50, indicating contraction. The Case-Shiller National Home Price Index is expected to show a high single-digit increase in October but less than in September. Growth in home prices peaked in March and has been declining ever since as mortgage rates have risen.

There are no prominent companies that are scheduled to report third quarter earnings this week.

Portfolio Strategy

The end of the year historically has been good for stock market investors and with the S&P 500 Index down 18% through the close of business on December 23^rd, a year-end rally could not come at a better time. The official Santa Claus rally period is the last five trading days of the year and the first two trading days of the new year, which means this time it runs from December 23^rd through January 4^th. There is an old saying that goes, “If Santa Claus should fail to call, bears may come to Broad and Wall”. Over the past 94 years, the S&P 500 Index has risen nearly 75% of the time from Christmas to New Year’s Eve with an average gain over that time period of about 1%. Research also shows that when the S&P 500 declines 20% or more in a calendar year, the index posts a positive return two-thirds of the time the following year with a median gain of about 24%.  Investors can only hope that this year and next follow the same script as in past years. A soft landing of the economy in which inflation recedes more quickly than the Federal Reserve expects, allowing the Fed to pause its interest rate hikes, could avoid a recession and be beneficial for both corporate earnings and the stock market. Investor sentiment now is fragile, though, as weak economic data brings recession fears and strong economic data brings Federal Reserve fears.