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Look for stocks to lose 30% from here, says strategist David Rosenberg. And don’t even think about turning bullish until 2024.

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David Rosenberg, the former chief North American economist at Merrill Lynch, has been saying for almost a year that the Fed means business and investors should take the U.S. central bank’s effort to fight inflation both seriously and literally.

Rosenberg, now president of Toronto-based Rosenberg Research & Associates Inc., expects investors will face more pain in financial markets in the months to come.

“The recession’s just starting,” Rosenberg said in an interview with MarketWatch. “The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle.” Investors can expect to endure more uncertainty leading up to the time — and it will come — when the Fed first pauses its current run of interest rate hikes and then begins to cut.

Fortunately for investors, the Fed’s pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500
SPX,
-0.61%
could drop 30% from its current level before that happens. Said Rosenberg: “You’re left with the S&P 500 bottoming out somewhere close to 2,900.”

At that point, Rosenberg added, stocks will look attractive again. But that’s a story for 2024.

In this recent interview, which has been edited for length and clarity, Rosenberg offered a playbook for investors to follow this year and to prepare for a more bullish 2024. Meanwhile, he said, as they wait for the much-anticipated Fed pivot, investors should make their own pivot to defensive sectors of the financial markets — including bonds, gold and dividend-paying stocks.

MarketWatch: So many people out there are expecting a recession. But stocks have performed well to start the year. Are investors and Wall Street out of touch?

Rosenberg: Investor sentiment is out of line; the household sector is still enormously overweight equities. There is a disconnect between how investors feel about the outlook and how they’re actually positioned. They feel bearish but they’re still positioned bullishly, and that is a classic case of cognitive dissonance. We also have a situation where there is a lot of talk about recession and about how this is the most widely expected recession of all time, and yet the analyst community is still expecting corporate earnings growth to be positive in 2023.

In a plain-vanilla recession, earnings go down 20%. We’ve never had a recession where earnings were up at all. The consensus is that we are going to see corporate earnings expand in 2023. So there’s another glaring anomaly. We are being told this is a widely expected recession, and yet it’s not reflected in earnings estimates – at least not yet.

There’s nothing right now in my collection of metrics telling me that we’re anywhere close to a bottom. 2022 was the year where the Fed tightened policy aggressively and that showed up in the marketplace in a compression in the price-earnings multiple from roughly 22 to around 17. The story in 2022 was about what the rate hikes did to the market multiple; 2023 will be about what those rate hikes do to corporate earnings.

“ You’re left with the S&P 500 bottoming out somewhere close to 2,900. ”

When you’re attempting to be reasonable and come up with a sensible multiple for this market, given where the risk-free interest rate is now, and we can generously assume a roughly 15 price-earnings multiple. Then you slap that on a recession earning environment, and you’re left with the S&P 500 bottoming out somewhere close to 2900.

The closer we get to that, the more I will be recommending allocations to the stock market. If I was saying 3200 before, there is a reasonable outcome that can lead you to something below 3000. At 3200 to tell you the truth I would plan on getting a little more positive.

This is just pure mathematics. All the stock market is at any point is earnings multiplied by the multiple you want to apply to that earnings stream. That multiple is sensitive to interest rates. All we’ve seen is Act I — multiple compression. We haven’t yet seen the market multiple dip below the long-run mean, which is closer to 16. You’ve never had a bear market bottom with the multiple above the long-run average. That just doesn’t happen.

David Rosenberg: ‘You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios.’

Rosenberg Research

MarketWatch: The market wants a “Powell put” to rescue stocks, but may have to settle for a “Powell pause.” When the Fed finally pauses its rate hikes, is that a signal to turn bullish?

Rosenberg: The stock market bottoms 70% of the way into a recession and 70% of the way into the easing cycle. What’s more important is that the Fed will pause, and then will pivot. That is going to be a 2023 story.

The Fed will shift its views as circumstances change. The S&P 500 low will be south of 3000 and then it’s a matter of time. The Fed will pause, the markets will have a knee-jerk positive reaction you can trade. Then the Fed will start to cut interest rates, and that usually takes place six months after the pause. Then there will be a lot of giddiness in the market for a short time. When the market bottoms, it’s the mirror image of when it peaks. The market peaks when it starts to see the recession coming. The next bull market will start once investors begin to see the recovery.

But the recession’s just starting. The market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle when the central bank has cut interest rates enough to push the yield curve back to a positive slope. That is many months away. We have to wait for the pause, the pivot, and for rate cuts to steepen the yield curve. That will be a late 2023, early 2024 story.

MarketWatch: How concerned are you about corporate and household debt? Are there echoes of the 2008-09 Great Recession?

Rosenberg: There’s not going to be a replay of 2008-09. It doesn’t mean there won’t be a major financial spasm. That always happens after a Fed tightening cycle. The excesses are exposed, and expunged. I look at it more as it could be a replay of what happened with nonbank financials in the 1980s, early 1990s, that engulfed the savings and loan industry. I am concerned about the banks in the sense that they have a tremendous amount of commercial real estate exposure on their balance sheets. I do think the banks will be compelled to bolster their loan-loss reserves, and that will come out of their earnings performance. That’s not the same as incurring capitalization problems, so I don’t see any major banks defaulting or being at risk of default.

But I’m concerned about other pockets of the financial sector. The banks are actually less important to the overall credit market than they’ve been in the past. This is not a repeat of 2008-09 but we do have to focus on where the extreme leverage is centered.

Read: The stock market is wishing and hoping the Fed will pivot — but the pain won’t end until investors panic

It’s not necessarily in the banks this time; it is in other sources such as private equity, private debt, and they have yet to fully mark-to-market their assets. That’s an area of concern. The parts of the market that cater directly to the consumer, like credit cards, we’re already starting to see signs of stress in terms of the rise in 30-day late-payment rates. Early stage arrears are surfacing in credit cards, auto loans and even some elements of the mortgage market. The big risk to me is not so much the banks, but the nonbank financials that cater to credit cards, auto loans, and private equity and private debt.

MarketWatch: Why should individuals care about trouble in private equity and private debt? That’s for the wealthy and the big institutions.

Rosenberg: Unless private investment firms gate their assets, you’re going to end up getting a flood of redemptions and asset sales, and that affects all markets. Markets are intertwined. Redemptions and forced asset sales will affect market valuations in general. We’re seeing deflation in the equity market and now in a much more important market for individuals, which is residential real estate. One of the reasons why so many people have delayed their return to the labor market is they looked at their wealth, principally equities and real estate, and thought they could retire early based on this massive wealth creation that took place through 2020 and 2021.

Now people are having to recalculate their ability to retire early and fund a comfortable retirement lifestyle. They will be forced back into the labor market. And the problem with a recession of course is that there are going to be fewer job openings, which means the unemployment rate is going to rise. The Fed is already telling us we’re going to 4.6%, which itself is a recession call; we’re going to blow through that number. All this plays out in the labor market not necessarily through job loss, but it’s going to force people to go back and look for a job. The unemployment rate goes up — that has a lag impact on nominal wages and that is going to be another factor that will curtail consumer spending, which is 70% of the economy.

“ My strongest conviction is the 30-year Treasury bond. ”

At some point, we’re going to have to have some sort of positive shock that will arrest the decline. The cycle is the cycle and what dominates the cycle are interest rates. At some point we get the recessionary pressures, inflation melts, the Fed will have successfully reset asset values to more normal levels, and we will be in a different monetary policy cycle by the second half of 2024 that will breathe life into the economy and we’ll be off to a recovery phase, which the market will start to discount later in 2023. Nothing here is permanent. It’s about interest rates, liquidity and the yield curve that has played out before.

MarketWatch: Where do you advise investors to put their money now, and why?

Rosenberg: My strongest conviction is the 30-year Treasury bond
TMUBMUSD30Y,
3.674%.
The Fed will cut rates and you’ll get the biggest decline in yields at the short end. But in terms of bond prices and the total return potential, it’s at the long end of the curve. Bond yields always go down in a recession. Inflation is going to fall more quickly than is generally anticipated. Recession and disinflation are powerful forces for the long end of the Treasury curve.

As the Fed pauses and then pivots — and this Volcker-like tightening is not permanent — other central banks around the world are going to play catch up, and that is going to undercut the U.S. dollar
DXY,
+0.70%.
There are few better hedges against a U.S. dollar reversal than gold. On top of that, cryptocurrency has been exposed as being far too volatile to be part of any asset mix. It’s fun to trade, but crypto is not an investment. The crypto craze — fund flows directed to bitcoin
BTCUSD,
+0.35%
and the like — drained the gold price by more than $200 an ounce.

“ Buy companies that provide the goods and services that people need – not what they want. ”

I’m bullish on gold
GC00,
+0.22%
– physical gold — bullish on bonds, and within the stock market, under the proviso that we have a recession, you want to ensure you are invested in sectors with the lowest possible correlation to GDP growth.

Invest in 2023 the same way you’re going to be living life — in a period of frugality. Buy companies that provide the goods and services that people need – not what they want. Consumer staples, not consumer cyclicals. Utilities. Health care. I look at Apple as a cyclical consumer products company, but Microsoft is a defensive growth technology company.

You want to be buying essentials, staples, things you need. When I look at Microsoft
MSFT,
-0.61%,
Alphabet
GOOGL,
-1.79%,
Amazon
AMZN,
-1.17%,
they are what I would consider to be defensive growth stocks and at some point this year, they will deserve to be garnering a very strong look for the next cycle.

You also want to invest in areas with a secular growth tailwind. For example, military budgets are rising in every part of the world and that plays right into defense/aerospace stocks. Food security, whether it’s food producers, anything related to agriculture, is an area you ought to be invested in.

You want to be in defensive areas with strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios. If you follow that you’ll do just fine. I just think you’ll do far better if you have a healthy allocation to long-term bonds and gold. Gold finished 2022 unchanged, in a year when flat was the new up.

In terms of the relative weighting, that’s a personal choice but I would say to focus on defensive sectors with zero or low correlation to GDP, a laddered bond portfolio if you want to play it safe, or just the long bond, and physical gold. Also, the Dogs of the Dow fits the screening for strong balance sheets, strong dividend payout ratios and a nice starting yield. The Dogs outperformed in 2022, and 2023 will be much the same. That’s the strategy for 2023.

More: ‘It’s payback time.’ U.S. stocks have been a no-brainer moneymaker for years — but those days are over.

Plus: ‘The Nasdaq is our favorite short.’ This market strategist sees recession and a credit crunch slamming stocks in 2023.

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February 6, 2023

6 cheap stocks that famed value-fund manager Bill Nygren says can help you beat the market

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These are tricky times in the stock market, so it pays to look to the best stock-fund managers for guidance on how to behave now. Veteran value investor Bill Nygren belongs in this camp, because the Oakmark Fund OAKMX he co-manages consistently and substantially outperforms its peers.

That isn’t easy, considering how many fund managers fail to do so. Nygren’s fund beats its Morningstar large-cap value index and category by more than four percentage points annualized over the past three years. It also outperforms at five and…

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January 25, 2023

Chaos on the Trading Floor as Narrative Shifts, Earnings Misses Pile Up

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Trading right now is chaotic. We’re watching earnings land and misses pile up, while the narrative on the economy shifts from inflation to a recession.

The producer price index report on Wednesday morning was lower than expected, which helped to cause a strong open as price fears continued to drop. In addition, retail sales were weaker than expected, which illustrates slowing demand and will also temper inflationary pressures, but it raises concerns about a sputtering economy. The Fed may have already tightened too much, and we are starting to see the economy respond accordingly.

Early breadth was very strong but is starting to slip as the S&P 500 falls into the opening gap. The Nasdaq and Nasdaq 100 have had seven-straight positive days, so a “sell the news” reaction would not be a big surprise. There also is some poor positioning that is providing support for now.

Conditions are now ripe for an intraday reversal, and we are seeing some signs of that now. The economic news on Wednesday is a mixed bag as it indicates inflation is cooling, but the likelihood of recession is increasing. A quarter percentage-point hike is now expected at the next Fed meeting — with the odds now at 97% — so weaker inflation is already discounted.

In response to the market action, I’m managing positions tightly, holding high levels of cash and see little opportunity to build longer-term positions right now. One name I’ve added to is small-cap pharma stock, Actinium Pharmaceuticals Inc., (ATNM) , but otherwise, I’m working on some index shorts.

So far this week we has seen 18 earnings reports, and 11 earnings per share misses. That is highly unusual. Typically EPS beats are 70% or more. But stocks have not been hit too hard on these misses so far. We have to watch this closely.

(Please note that due to factors including low market capitalization and/or insufficient public float, we consider this stock to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)

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January 18, 2023

What does the stock market’s rocky 2023 start mean for the rest of the year?

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The first trading days of January loom large on Wall Street as being able to foretell the U.S. stock market’s direction for the full year. What does that mean for 2023?

Not much. January’s reputation is largely undeserved. Even when the market declines over the first sessions of January, it still is more likely than not to rise over the remainder of the year.

That should provide some solace to followers of these “first-days-of-January” indicators, who are biting their nails over the stock market’s weakness out of the starting gate on the first trading day of the year.

The accompanying table reviews the track records of the various iterations of these indicators. The percentages are based on the Dow Jones Industrial Average
DJIA,
-0.03%
back to its creation in the 1890s.

Length of initial period	% of time DJIA rises over remainder of year when it rises during initial period	% of time DJIA rises over remainder of year when it declines during initial period
First trading day of January	73%	53%
First 2 trading days of January	70%	56%
First 5 trading days of January	70%	58%
All of January	74%	56%

On the one hand, notice that there are greater odds of the market rising if it also rises in the first sessions of January. On the other hand, notice also that even when the market falls in those first sessions the odds of the market rising for the remainder of the year are still above 50%.

To put the table’s data in context, bear in mind that the odds of the stock market rising in any given calendar year are 64% (based on the Dow’s track complete history). So, depending on the “first-day-of-January” indicator on which you focus, the odds of an “up” year increase or decrease by a modest amount — between 6 and 11 percentage points. These differences are only marginally significant at the 95% confidence level that statisticians often use when assessing if a pattern is genuine.

There are several additional reasons not to put too much weight on these first-days-of-January indicators:

There is nothing particularly unique about January. Many other days of the year have the same apparent ability to foretell the market’s direction over the remainder of the next year. A trader intent on following the lead of all such “indicators” would be whipsawed into and out of stocks on a near-daily basis.
The marginally significant success of the early-days-of-January indicators traces in large part to the earlier part of the 20^th century. Since 1960, in contrast, their track records are not statistically significant.

The bottom line? Regardless of how the market performs over the first days of this month, the intelligent bet is that the stock market will rise this year.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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January 3, 2023

This little-known but spot-on economic indicator says recession and lower stock prices are all but certain

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An obscure and arcane economic indicator suggests that Federal Reserve Chairman Jerome Powell was wrong when he said at his Nov. 30 news conference that “There is a path to a soft, a softish landing” for the U.S. economy.

This indicator traces to the large divergence between consumers’ views about the economy in general and their immediate personal financial circumstances in particular. A recession has occurred each time over the past four decades in which this divergence even approached its current level.

To measure this divergence, this indicator focuses on the Conference Board’s Consumer Confidence Index (CCI) and the University of Michigan’s Consumer Sentiment Survey (UMI). While there is some overlap between what these two indices measure, there is a significant difference in emphasis, according to James Stack of InvesTech Research, from whom I first heard about this indicator. The CCI more heavily reflects consumers’ attitudes towards the overall economy, according to Stack, while the UMI is more heavily weighted towards their immediate personal circumstances.

Perhaps not surprisingly, the CCI currently is higher than the UMI. Even as American consumers’ attitudes towards their immediate financial situations continue to sour, due to everything from inflation to higher mortgage rates to a softening housing market, the overall economy has proven to be remarkably resilient. Yet more evidence of this resilience was the Dec. 2 jobs report, in which the Labor Department reported the creation of a much-higher-than-expected number of new jobs.

What is more surprising is the magnitude of the current divergence. According to the latest data releases from the Conference Board and the University of Michigan in late November, the CCI is 43.4 percentage points higher than the UMI. That’s close to a record; the latest reading stands at the 98^th percentile of all monthly readings of the past four decades.

Furthermore, as you can see from the chart above, a recession was in the economy’s not-too-distant future (shadowed bars) the past four times this difference rose to even 25 percentage points.

Consumer sentiment and the stock market

Stark as this chart’s correlations are, it’s difficult for a sample with just four observations to be statistically significant. To test this indicator’s potential, I next measured its ability to predict the S&P 500’s
SPX,
-1.96%
inflation-adjusted total return over the subsequent one- and five-year periods. The table below reflects data since 1979, which is when monthly data for both of these consumer indices first began to be reported.

When divergence between CCI and UMI was…	S&P 500’s average total real return over subsequent 12 months	S&P 500’s average total real return over subsequent 5 years (annualized)
In the highest 10% of monthly readings since 1979	-0.4%	-3.1%
In the lowest 10% of monthly readings since 1979	+14.3%	+14.8%

The differences shown in this table are statistically significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.

The bottom line? It’s not good news, for the economy in general or the U.S. stock market in particular, that consumers are so much more upbeat about the overall economy than they are about their immediate financial circumstances.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: The U.S. job market is strong, but layoffs are on the rise. Is this a good — or bad — time to ask for a raise?

Also read: Bigger paychecks are good news for America’s working families. Why does it freak out the Fed?

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December 5, 2022

Black Friday Brings a Darker Outlook for Tesla

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When Black Friday comes…. Steely Dan is dominating my mental soundtrack this morning. But, as I mentioned in my column earlier this week, I like to stay away from the herd. So, instead of focusing on mall traffic or Amazon Prime (AMZN) activity, I will focus on a much larger consumer base than the one in the U.S.: China.

The People’s Bank of China reportedly will cut the reserve requirement ratio for most banks by a quarter percentage point by Dec. 5, which would pour in about $70 billion of liquidity into the economy.

I spend so much time on the energy sector that I have adopted its lingo. We always talk about the marginal demand for a barrel of oil. So, if we look at the global economy, China is counted upon to be the marginal demand for … just about everything.

Yes, that obviously impacts oil, and the recent zero-Covid lockdowns in Beijing and other cities have indeed pressured oil via its Brent crude pricing benchmark. Brent is flat now at $85.30/barrel.

But energy is still the best of a bad bunch of U.S. stocks. I saw the stat the other day that energy is the only one of the 12 S&P 500 sectors that has posted a gain thus far in 2022. Rest assured that I am not selling any energy names now, nor do I plan to before Dec. 23.

But when I look at the Chinese consumer, I am focused on purchases of goods, not commodities. The first name that jumps to mind as a China Play is Tesla (TSLA) .

China’s auto safety regulators announced yet another recall action Friday on older Teslas (models that were actually made at Tesla’s California facility). A terrible record on initial quality combined with a softening macro environment in China does not bode well for Tesla’s global growth prospects. Elon Musk knew that he had to grow where the marginal growth was in the global economy, so he opened Tesla Shanghai. But macro rules the micro, just as much in China as it does in the U.S.

Earlier this year, the Insane Clown Posse of sell-side analysts that pretends to follow Tesla were climbing all over each other to raise forecasts for Tesla’s unit deliveries for 2022. The highest forecast I saw was 1.7 million units, but now, with a slower China and an awful Europe (Tesla opened a factory in Germany this year) it looks as if consensus is sitting at 1.35 million units delivered for Tesla in 2022. I think they will struggle to get to 1.3 mm units.

Those unit delivery forecast declines were largely a factor of analysts lowering forecasts for Tesla’s deliveries in China. As delivery wait times mysteriously disappear on Tesla’s Chinese website, we can see that demand has dissipated there. The Model 3 is 5.5 years old and is no longer selling well in China (or anywhere else,) and the Y, while still selling well, is expensive for the average Chinese consumer.

Tesla was painted as a China Play, and with China slowing so much that its Central Bank is throwing open the monetary spigot, look for Elon to continue to focus his energies elsewhere. As TSLA shares have declined by around 50% this year, I don’t blame him for doing so.

(For some bonus content, and if you were understandably more focused on family and football yesterday than Brazilian financial media, this is my interview with Brazil Journal regarding Elon Musk, Twitter (TWTR) and Tesla that posted yesterday on that excellent site.)_

Black Friday comes for everyone. Just make sure your portfolio doesn’t have one today, or any other Friday in the foreseeable future.

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November 25, 2022

Haldiram brothers to merge operations ahead of market debut: Report

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Days after Bikaji made a decent market debut, another snacking major is on the verge of getting listed on stock markets and is making preparations towards that, said a report on Friday.

A CNBC TV-18 report said the three brothers who run Haldiram’s in Delhi and Nagpur have decided to merge their operations to create one snacking major.

“The merger is part of a plan to file for an initial public offering (IPO) in a bid to debut on Dalal Street in the next 18 months, as per people in the know,” stated the report.

Haldiram’s history goes back to the 1930s when Gangabishan Agarwal founded the snack company. Six decades later, his grandson, Shiv Ratan Agarwal, branched out to start his brand called Bikaji in 1993.

Bikaji has established market leadership in its core markets of Rajasthan, Assam and Bihar.

Also read: ‘No truth to this claim’: Adani Group refutes report of opening family office overseas

Also read: Food delivery firm Zomato’s co-founder Mohit Gupta resigns

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November 18, 2022

Fed’s Waller says market has overreacted to consumer inflation data: ‘We’ve got a long, long way to go’

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Federal Reserve Gov. Christopher Waller said Sunday that financial markets seem to have overreacted to the softer-than-expected October consumer price inflation data last week.

“It was just one data point,” Waller said, in a conversation in Sydney, Australia, sponsored by UBS.

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go ” Waller said.

Investors cheered the soft CPI print, released Thursday, driving stocks up to their best week since June. The S&P 500 index
SPX,
+0.92%
closed 5.9% higher for the week.

The data showed that the yearly rate of consumer inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation had peaked at a nearly 41-year high of 9.1% in June.

Waller said it was good there was some evidence that inflation was coming down, but noted that there were other times over the past year where it looked like inflation was turning lower.

“We’re going to see a continued run of this kind of behavior and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here,” Waller said.

“We’ve got a long, long way to go to get inflation down. Rates are going keep going up and they are going to stay high for awhile until we see this inflation get down closer to our target,” he added.

The Fed is focused on how high rates need to get to bring inflation down, and that will depend solely on inflation, he said.

Waller said “the worst thing” the Fed could do was stop raising rates only to have inflation explode.

The 7.7% inflation rate seen in October “is enormous,” he added.

The Fed signaled at its last meeting earlier this month that it might slow down the pace of its rate hikes in coming meetings.

The central bank has boosted rates by almost 400 basis points since March, including four straight 0.75-percentage-point hikes that had been almost unheard of prior to this year.

“We’re looking at moving in paces of potentially 50 [basis points] at the next meeting or the next meeting after that,” Waller said.

The Fed will hold its next meeting on Dec. 13-14, and then again on Jan. 31-Feb. 1.

At the same time, Powell said the Fed was likely to raise rates above the 4.5%-4.75% terminal rate that they had previously expected.

“The signal was ‘quit paying attention to the pace and start paying attention to where the endpoint is going to be,’” Waller said.

In the wake of the CPI report, investors who trade fed funds futures contracts see the Fed’s terminal rate at 5%-5.25% next spring and then quickly falling back to 4.25%-4.5% by November. That’s well below the levels prior to the CPI data.

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November 13, 2022

Wall St down for fourth straight day on Fed rate hike worry

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US stocks closed lower for a fourth consecutive session on Thursday as economic data did little to alter expectations the Federal Reserve would continue raising interest rates for longer than previously thought.

Following the Federal Reserve’s statement on Wednesday, comments from Fed Chair Jerome Powell that it was “very premature” to be thinking about pausing its rate hikes sent stocks lower as U.S. bond yields and the U.S. dollar rose, a pattern that extended into Thursday.

Economic data on Thursday showed a labor market that continues to stay strong, although a separate report showed growth in the services sector slowed in October, keeping the Fed on its aggressive interest rate hike path.

“Years ago the Fed’s job was to take away the punch bowl and that balance is always a very difficult transition, you want the economy to slow to keep inflation from getting out of hand but you want enough earnings to support stock prices,” said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.

“It is about the rate of change as much as the change so when the rate of change starts to slow … that almost becomes a positive even though in absolute terms we are going to continue to see higher rates, and higher rates means more competition for stocks and lower multiples.”

The Dow Jones Industrial Average fell 146.51 points, or 0.46%, to 32,001.25, the S&P 500 .SPX lost 39.8 points, or 1.06%, to 3,719.89 and the Nasdaq Composite dropped 181.86 points, or 1.73%, to 10,342.94.
While traders are roughly evenly split between the odds of a 50 basis-point and 75 basis-point rate hike in December, the peak Fed funds rate is seen climbing to at least 5%, compared with a prior view of a rise to the 4.50%-4.75% range.

Investors will closely eye the nonfarm payrolls report due on Friday for signs the Fed’s rate hikes are beginning to have a notable impact on slowing the economy.

The climb in yields weighed on megacap growth companies such as Apple Inc, down 4.24%, and Alphabet Inc, which lost 4.07% and pulled down the technology and communication services sectors as the worst-performing on the session.

Losses were curbed on the Dow thanks to gains in industrials including Boeing Co, which rose 6.34%, and a 2.20% climb in heavy equipment maker Caterpillar Inc.

Qualcomm Inc and Roku Inc shed 7.66% and 4.57%, respectively, after their holiday quarter forecasts fell below expectations.

With roughly 80% of S&P 500 companies having reported earnings, the expected growth rate is 4.7%, according to Refinitiv data, up slightly from the 4.5% at the start of October.

Volume on US exchanges was 11.81 billion shares, compared with the 11.63 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 1.75-to-1 ratio; on Nasdaq, a 1.50-to-1 ratio favored decliners.

The S&P 500 posted 6 new 52-week highs and 46 new lows; the Nasdaq Composite recorded 77 new highs and 291 new lows.

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November 3, 2022

Another jumbo Fed rate hike is expected this week — and then life gets difficult for Powell

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First the easy part.

Economists widely expect Federal Reserve monetary-policy makers to approve a fourth straight jumbo interest-rate rise at its meeting this week. A hike of three-quarters of a percentage point would bring the central bank’s benchmark rate to a level of 3.75%- 4%.

“The November decision is a lock. Well, I would be floored if they didn’t go 75 basis points,” said Jonathan Pingle, chief U.S. economist at UBS.

The Fed decision will come at 2 p.m. on Wednesday after two days of talks among members of the Federal Open Market Committee.

What happens at Fed Chairman Jerome Powell’s press conference a half-hour later will be more fraught.

The focus will be on whether Powell gives a signal to the market about plans for a smaller rise in its benchmark interest rate in December.

The Fed’s “dot plot” projection of interest rates, released in September, already penciled in a slowdown to a half-point rate hike in December, followed by a quarter-point hike early in 2023.

The market is expecting signals about a change in policy, and many think Powell will use his press conference to hint that a slower pace of interest-rate rises is indeed coming.

A Wall Street Journal story last week reported that some Fed officials are not keen to keep hiking rates by 75 basis points per meeting. That, alongside San Francisco Fed President Mary Daly’s comment that the Fed needs to start talking about slowing down the pace of hikes, were taken as a sign of a slowdown to come by the stock and bond markets.

“No one wants to be late for the pivot party, so the hint was enough,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Luke Tilley, chief economist at Wilmington Trust, said he thinks Powell will signal a smaller rate hike in December by focusing on some of the good wage-inflation news that was published earlier Friday.

There was a clear slowdown in private-sector wage growth, Tilley said.

See: U.S. third-quarter wage pressures cool a little from elevated levels

But the problem with Powell signaling he has found an exit ramp from the jumbo rate hikes this year is that his committee members might not be ready to signal a downshift, Pingle of UBS said. He argued that the inflation data writ large in September won’t give Fed officials any confidence that a cooling in price pressures is in the offing.

See: U.S. inflation still running hot, key PCE price gauge shows

Another worry for Powell is that future data might not cooperate.

There are two employment reports and two consumer-price-inflation reports before the next Fed policy meeting on Dec. 13–14.

So Powell might have to reverse course.

“If you pre-commit and the data slaps you in the head — then you can’t follow through,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.

This has been the Fed’s pattern all year, Stanley noted. It was only in March that the Fed thought its terminal rate, or the peak benchmark rate, wouldn’t rise above 3%.

While the Fed may want to slow down the pace of rate hikes, it doesn’t want the market to take a downshift in the size of rate rises as a signal that a rate cut is in the offing. But some analysts believe that the first cut in fact will come soon after the Fed reduces the size of its rate rises.

In general terms, the Fed wants financial conditions to stay restrictive in order to squeeze the life out of inflation.

Pingle said he expects Kansas City Fed President Esther George to formally dissent in favor of a slower pace of rate hikes.

There is growing disagreement among economists about the “peak” or “terminal rate” of this hiking cycle. The Fed has penciled in a terminal rate in the range of 4.5%–4.75%. Some economists think the terminal rate could be lower than that. Others think that rates will go above 5%.

Those who think the Fed will stop short of 5% tend to talk about a recession, with the fast pace of Fed hikes “breaking something.” Those who see rates above 5% think that inflation will be much more persistent.

Ultimately, Amherst Pierpont’s Stanley is of the view that the data aren’t going to be the deciding factor. “The answer to the question of what either forces or allows the Fed to stop is probably not going to come from the data. The answer is going to be that the Fed has a number in mind to pause,” he said.

The Fed “is careening toward this moment of truth where it has very tight labor markets and very high inflation, and the Fed is going to come out and say, ‘OK, we’re ready to pause here.’ “

“That strikes me that is going to be a very volatile period for the market,” he added.

Fed fund futures markets are already volatile, with traders penciling in a terminal rate above 5% two weeks ago and now seeing a 4.85% terminal rate.

Over the month of October, the yield on the 10-year Treasury note
TMUBMUSD10Y,
4.046%
rose steadily above 4.2% before softening to 4% in recent days.

“When you get close to the end, every move really counts,” Stanley said.

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October 30, 2022