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US economy won’t collapse under Fed ‘weight’ based on performance of these sectors despite oil and inflation risks


Investors are trying to read tea leaves in a volatile US stock market to gauge whether its recent rally can continue after Federal Reserve Chairman Jerome Powell unleashed optimism in late November by indicating that aggressive rate hikes may slow.

“The leaders of the stock market are telling you that the economy is not going to collapse under the weight of the stock market,” said Andrew Slimmon, senior portfolio manager for equities at Morgan Stanley Investment Management. Fed in the near future. interview. “I think you’re going to have a strong market by the end of the year.”

Slimmon has pointed to the outperformance of cyclical sectors of the market, including financials, industrials and materials over the past few months, saying those sectors “will die out” if the economy The company’s economy and earnings are on the verge of collapse.

The US added 263,000 new jobs in November. exceed forecast of 200,000 from economists polled by The Wall Street Journal. Unemployment rate unchanged at 3.7%, US Bureau of Labor Statistics Friday report. That’s a nearly half-century low. Meanwhile, hourly pay rose 0.6 percent last month to an average of $32.82, the report showed.

Labor market ‘resilience’ and ‘rebound wage pressures’ won’t stop the Fed from slowing the 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 reduce the size of its next rate hike in December by 50 basis points, following a string of 75 basis points.

“In the bigger picture, a strong jobs market is good for the economy and only bad because the Fed’s mission is to keep inflation in check,” said Louis Navellier, chief investment officer at Navellier.

The Fed raised its benchmark interest rate in an attempt to tame high inflation that showed signs of abating in October based on consumer price index data. Next week, investors will receive information on wholesale inflation for November as measured by the producer price index. PPI data will be released on December 9.

“That would be an important number,” said Slimmon.

According to Jeffrey Kleintop, chief global investment strategist at Charles Schwab, the producer price index is more driven by supply issues than consumer demand.

“I think PPI pressure has peaked based on the decline we see in supply chain issues,” Kleintop said in a phone interview. He said he expected that the upcoming PPI print could reinforce the overall message of central banks slowing the pace of rate hikes.

Next week, investors will also keep a close eye on initial jobless claims data, scheduled for release on December 8, as a leading indicator of market health. labor.

Morgan Stanley’s Slimmon warns: “We’re not out of the woods yet.” While he’s 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 the rally, he points out that the market’s inverted yield curve The government bond market is cause for concern.

Inverse, when short-term Treasury yields overtake long term interest ratehas historically preceded a recession.

“Yield curves are excellent predictors of a recession, but they are not good predictors of when that will happen,” said Slimmon. His “doubt” is a recession that could happen after the first part of 2023.

‘Major technical recovery’

Meanwhile, the S&P 500 index closed Friday slightly lower at 4,071.70, but still posted a weekly gain of 1.1% after a strong Nov. 30 rally driven by Powell’s remarks at The Brookings Institution suggests the Fed may scale back its rate hike on December 30. 13-14 policy meeting.

“The bears disparaged” the rally sparked by Powell, said Yardeni Research, saying his speech was “hawkish and did not justify the market’s bullish bias,” Yardeni said. But “we believe the bulls are correctly aware that inflation has peaked this summer and it is a relief to hear that,” Research said in an emailed note on Dec. 1. Powell says the Fed may be willing to let inflation drop without pushing the economy into recession.

While this year’s inflation crisis has left investors “focused on danger, not opportunity,” Mr. Powell is signaling that it’s time to consider the latter, according to Tom Lee. head of research at Fundstrat Global Advisors, in a note Friday morning. Lee was upbeat ahead of Powell’s Brookings address, detailing in a November 28 note that the 11 headwinds of 2022 have ‘overturned’.

See: Fundstrat’s Tom Lee says stock market could see ‘fireworks’ through year-end as headwinds have ‘turned upside down’

The S&P 500 is back above its 200-day moving average, something Lee highlighted in his note Friday before the stock market open. He pointed out that for the second day in a row the index closed above that moving average was a “major technical rebound,” writing that “during the 2022 ‘crisis’ this did not happen. (see below), so this is a break in the pattern. “

FUNDSTRAT GLOBAL ADVISORS NOTES FROM DECEMBER Morning. 2, 2022

On Friday, S&P 500
SPX,
-0.12%

closed again above the 200-day moving average, then stood at 4,046, according to FactSet data.

Navellier said in a Friday note that the 200-day moving average is “important” to watch that day because of whether the US stock market benchmark ending above or below it could ” leading to further momentum in both directions.”

But Charles Schwab’s Kleintop says he can “lighten the technical factors a little bit” in a market that is currently more macro-oriented. “When a simple word of Powell could push” the S&P 500 above or below the 200-day moving average, he said, “it might not be driven much by the supply or demand for equity in the equity markets.” individual investors.”

Kleintop said he is keeping an eye on the risk to the stock market next week: a price ceiling on Russian oil could take effect as soon as Monday. He worries about how Russia might react to such a ceiling. If the country pulls oil out of the global market, he said, it could cause “oil prices.”
CL.1,
+0.45%

to bounce back” and add to inflationary pressures.

Read: G-7 and Australia join EU in setting a price ceiling of $60 per barrel on Russian oil

Navellier, who said “there is still room for a slight landing” if inflation falls faster than expected, also expressed concern about energy prices in his note. “One thing that could re-trigger inflation is a spike in energy prices, which is best hedged by over-exposure to energy stocks,” he wrote.

“Volatility is likely to remain high,” said Navellier, who points to “the determination of the Fed to keep squeezing the brakes.”

U.S. stocks have had some big swings lately, with the S&P 500 index rising more than 5% last month after gaining 8% in October and sliding more than 9% in September, FactSet data showed. Major benchmarks ended mixed Friday, but S&P 500, Dow Jones Industrial Average
DIA,
-0.10%

and the tech-heavy Nasdaq Composite
COMPUTER,
-0.18%

each rose for a second week in a row.

“Keep the bias for those with quality earnings,” says Navellier, “taking advantage to add to those withdrawals.”

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