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Market Recap

December 30, 2022
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Markets continued to focus their attention on interest rates and the Federal Reserve (the Fed) during the first two weeks of December. Leading up to the Fed’s December meeting (held on the 13th and 14th) volatility was driven by the “interest rate guessing game” where Wall Street scrutinizes economic data to predict the Fed’s interest rate strategy.

Counterintuitively, the story continues to be: good news for the economy is bad news for Fed interest rate increases. Case in point: the jobs report for the month of November was released on Friday, December 2nd, and showed an increase of 263,000 jobs1. Economists had been expecting a slowdown in job growth and predicted a gain of only 200,000 new jobs. How did markets respond to the unexpectedly strong jobs market? They initially sank on the news, although they did end the day essentially flat. Markets dropped again the following Monday, led by the NASDAQ Composite Index (NASDAQ) which closed down 222 points (1.93%). The S&P 500 was down 73 points (1.79%) and the Dow Jones Industrial Average (the Dow) fell by 483 points (1.4%.) The following week’s jobless claims met economist expectations and showed a modest increase. In other words, an increased number of people filed for first time unemployment benefits. This bad news for workers triggered a market rally and the Dow gained 184 points (0.55%), the S&P rose 30 points (0.75%) and the NASDAQ grew by 123 points (1.13%).

If you’re scratching your head at this point, trying to make sense out of market behavior, you’re not alone. Here’s the rationale: as long as the economy (which includes the labor market) remains strong, the Fed will continue to raise rates. They need to inflict enough pain that inflation returns to normal levels. 

With regard to the workforce, concerns over a stronger-than-expected labor market stoke fears of continuing interest rate hikes. “The labor market remains far too hot for the Fed’s liking,” Wells Fargo economists Sarah House and Michael Pugliese wrote in a research note. Competition for workers has been pushing wages up at a rapid rate, and the Federal Reserve is worried that could add to already high inflation. “Demand for workers far exceeds the supply of available workers,” [Fed Chairman Jerome] Powell said in a recent speech. “Thus another condition that we’re looking for is the restoration of balance between supply and demand in the labor market.2 In other words, fewer jobs and higher unemployment is the goal – because that would signal an easing of inflation. 

The Fed announced their much-anticipated interest rate hike on December 14th. As expected, they raised rates 0.5%. It wasn’t the Fed action, but rather comments made by the Chairman that caught the market’s attention. “The largest amount of pain, the worst pain would come from a failure to raise rates high enough and from us allowing inflation to become entrenched in the economy,” said Chairman Powell. Apparently, the Fed is willing to raise rates higher and faster than the market anticipated. That drove widespread losses after Wednesday’s announcement. 

Losses continued on Thursday, December 15, as mostly positive economic data reinforced the Fed’s inflation plan. The Labor Department reported first-time jobless claims fell to 211,000 (economists had expected 230,000) and the Philadelphia Federal Reserve’s Manufacturing Business Outlook survey showed a strong improvement. All the major markets closed with losses, with the NASDAQ falling 360 points (3.23%), the S&P 500 lower by 100 points (2.49%), and the Dow losing 746 points (2.25%). One interesting report, the Commerce Department’s U.S. Retail Sales for November, did show an unexpected drop from October, signaling that there may be some signs of weakness economy.3 

Traditionally December is the best month for market returns. Unfortunately, this particular December looks to buck that trend. In times of volatility, it helps to keep things in perspective. Every market downturn in the past has been followed by a rally and recovery. While inflation is still higher than we’d like, there are numerous signs that it has peaked and is trending downward. As aggressive as the Fed has been to combat inflation, we believe they will be equally aggressive in accommodating economic growth once inflation has reached normal levels. In other words, Keep Calm and Carry On!

Reviewing returns for the first half of December, all the major markets posted losses. As of December 15th, the Dow sank 1,388 points (4.01%), the S&P 500 lost 184 points (4.52%) and the NASDAQ fell by 657 points (5.73%).

1, 2 www.npr.org “The U.S. gained 263,000 jobs last month. It’s good news for workers, but not the Fed” December 2, 2022

3 www.foxbusiness.com “Dow plunges in perfect storm for stocks” December 15, 2022

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Past performance is no guarantee of future results. No person or system can predict the market. There is no guarantee that any strategies discussed will result in a positive outcome. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal. S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. The NASDAQ is an index that tracks the cumulative results on a market capitalization basis of all stocks trading in the NASDAQ system. The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot invest directly in an index. Diversification does not guarantee a profit or protect against a loss.