The US economy will not collapse under the “weight” of the Federal Reserve based on the performance of these sectors despite the risks of inflation and oil

Investors are trying to read the tea leaves in the volatile US stock market to gauge whether the recent rally can continue after Federal Reserve Chairman Jerome Powell unleashed bullish sentiment at the end of November by suggesting that his aggressive rate hikes could slow.

“The stock market leadership tells you that the economy is not going to collapse under the weight of the Fed in the near term,” Andrew Slimon, equity portfolio manager at Morgan Stanley Investment Management, said by phone. an interview. “I think you’re going to have a strong market at the end of the year.”

Solomon pointed to the outperformance of the cyclical sectors of the market, including the financial, industrial and materials sectors over the past two months, saying that these sectors will “roll to death” if the economy and corporate profits are about to collapse.

The United States added 263,000 new jobs in November, exceeding the forecast of 200,000 jobs surveyed by economists polled by The Wall Street Journal. On Friday, the US Bureau of Labor Statistics reported that the unemployment rate was unchanged at 3.7%. This is close to the lowest level in half a century. Meanwhile, hourly wages rose 0.6% last month to an average of $32.82, according to the report.

Capital Economics said in an emailed note on Friday that the “resilient” labor market and “re-emergence of wage pressures” will not prevent the Federal Reserve from slowing the pace of rate hikes this month. Capital Economics said it still expects the central bank to cut the size of its next rate hike in December to 50 basis points, after a series of 75 basis point increases.

“In the bigger picture, a strong job market is good for the economy and only bad because of the Fed’s mission to stifle inflation,” Louis Navillier, Navillier’s chief investment officer, said in a note Friday.

The Fed raised its benchmark interest rate in an effort to tame high inflation that showed signs of abating in October based on consumer price index data. Next week, investors will get a read on November’s wholesale inflation as measured by the Producer Price Index. Producer price index data will be released on December 9.

“That will be an important number,” said Solomon.

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

“I think PPI pressures have peaked based on the reduction we have seen in supply chain issues,” Kleintop said in a phone interview. He said he expects the upcoming PPI reading to reinforce the overall message of central banks giving up on the pace of interest rate hikes.

Next week, investors will closely watch the Initial Jobless Claims data, due Dec. 8, as a leading indicator of the health of the labor market.

“We’re not out of the woods,” warned Slimmon of Morgan Stanley. Although he is optimistic about the stock market in the near term, in part because there is “plenty of money on the sidelines” that could help fuel the rally, he cited the inverted yield curve in the Treasury market as a cause for concern.

Reversals, when short-term Treasury yields rise above longer-term rates, have historically preceded recessions.

“Yield curves are excellent indicators of an economic slowdown, but they are not very good indicators of when that will happen,” said Slimon. His “skepticism” is that a recession may come after the first part of 2023.

‘Massive tech recovery’

Meanwhile, the S&P 500 closed slightly lower on Friday at 4,071.70, but still booked a weekly gain of 1.1% after surging on November 30 after Powell’s remarks at the Brookings Institution suggesting the Fed may alter the size of its interest rate increases in the coming months. December 1st. 13-14 Policy meeting.

“The bears disparaged” Powell’s rally, Yardini Research said in a note emailed Dec. 1, saying his speech was “hawkish and did not justify the market’s bullishness.” It peaked this summer and it felt good to hear Powell say the Fed may be willing to let inflation cool off without tipping the economy into recession.”

While this year’s inflation crisis has caused investors to focus “only on risk, not opportunity,” Powell was suggesting it was time to consider the latter, according to Tom Lee, head of research at Fundstrat Global Advisors, in a note Friday morning. . Lee was already optimistic before Powell’s speech at the Brookings Institution, detailing in a note dated November 28, 11 headwinds in 2022 “flipped.”

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

The S&P 500 has made its way back above its 200-day moving average, which Lee highlighted in his note on Friday before the stock market opened. He referred to the second consecutive day of the index closing above this moving average as a “massive technical recovery,” writing that “in the ‘crisis’ of 2022, this did not happen (see below), so this is a pattern break.”


On Friday, the S&P 500 SPX,
It closed back above the 200-day moving average, which then settled at 4,046, according to FactSet data.

Navellier said in a note on Friday that the 200-day moving average was “important” to watch that day as whether the US stock market index ended above or below could lead to more momentum in either direction.

But Charles Schwab’s Kleintop says it may “put a little less weight on technicals” in a macro-driven market right now. “When a simple word from Powell can propel the S&P 500 above or below its 200-day moving average,” he said, “it’s probably not being driven by supply or demand for stocks by individual investors.”

Kleintop said he was looking forward to risking the stock market next week: Russia’s oil price cap could take effect as soon as Monday. He worries about how Russia might respond to such a cap. He said that if the country moves to withhold oil from the global market, it could cause “CL.1 oil prices,
back again” and adding to inflationary pressures.

Read: The G7 and Australia join the European Union in setting a Russian oil price ceiling of $60 per barrel

Navillier, 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 reignite inflation is a sharp rise in energy prices, which could be better hedged with excessive exposure to energy stocks,” he wrote.

According to Navillier, “volatility is likely to remain elevated,” noting the Fed’s “intent to continue to put the brakes on.”

US stocks have seen some big swings lately, with the S&P 500 rising more than 5% last month after jumping 8% in October and falling more than 9% in September, according to FactSet data. Major indices closed mixed on Friday, but the S&P 500 and Dow Jones Industrial Average DJIA,
and the tech-heavy Nasdaq Composite,
Each rose for the second week in a row.

“Keep the bias towards the quality guys, with the benefit of increasing the draw back,” said Navillier.

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