Stocks Finish Higher After Fed Signals a Downshift in Rate Hikes

Performance for Week Ending 12.2.2022:

The Dow Jones Industrial Average (Dow) finished up 0.24%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) gained 1.21%, the Standard & Poor’s 500 Index (S&P 500) added 1.13% and the Nasdaq Composite Index (NASDAQ) tacked on 2.09%. Sector breadth was positive with 9 of the 11 S&P sector groups closing higher. The Communication Services sector (+3.31%) was the best performer followed by Consumer Discretionary (+2.10%) and Healthcare (+1.91%). The Energy sector was the worst performer, falling 1.97%.

*See below for Index Definitions

MARKET OBSERVATIONS: 11/28/22  – 12/2/22

The S&P 500 finished the week higher, its third weekly gain in the past four, as investors digested mixed economic reports and hints from the Federal Reserve that it will take a less aggressive path forward with its rate hiking campaign. Since the closing lower on October 12, the S&P has gained 13.8%. Speaking at the Brookings Institute, Fed Chairman Powell signaled that the Fed will slow the pace of interest-rate increases next month, while stressing rates will need to keep rising and remain restrictive for some time to beat inflation. His comments likely cement expectations for the Fed to raise interest rates by 50 basis points when they meet Dec. 13-14, following four straight 75 basis-point moves. “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in the text of his speech. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.” Ahead of Powell’s remarks, Fed Governor Lisa Cook said it would be prudent for the central bank to make smaller hikes as it determines how high it will need to go to tame price gains.

Economic Data – Mixed Signals: The economy continues to deliver mixed signals with the manufacturing sector showing signs of contraction while employment data remains healthy. The Institute for Supply Management reported the that their ISM Manufacturing Index contracted in November for the first time since May 2020. The underlying details of the report painted a picture of a sector that has started to roll over in the face of stiff economic headwinds. The report raised worries that Fed’s aggressive rate hike program, to cool inflation, has raised the odds of a recession in the year ahead. The ISM report tempered optimism around data that showed households boosted spending in October while the Fed's preferred inflation gauge -- the personal-consumption expenditures price index -- showed further signs that inflation is slowing. Meanwhile, the labor markets remain resilient with the Labor Department reporting that November nonfarm payrolls rose 263K, well ahead consensus expectations of a 200K gain. The unemployment rate was unchanged at 3.7% and was in line with expectations. Perhaps more alarming from the Fed’s perspective was that average hourly earnings during the month rose by a stronger than expected 0.6% and by 5.1% from a year ago. Investors were hoping for a Goldilocks report (not too hot, not to cold) but this report clearly signaled that the labor markets are likely still to “hot” for the Fed’s liking and therefore will keep pressure on the central bank to keep tightening policy. Following last week’s batch of economic data, the Atlanta Fed’s GDPNow model forecast Q4 GDP growth of 2.8% down from 4.3% growth during the prior week.

The Week Ahead: The data calendar will take center stage during the week ahead. Reports of interest include; October Factory Orders, the November ISM Services Index, the Producer Price Index for November, and the University of Michigan’s consumer sentiment and inflation expectations data. The Fed speaking calendar will be nonexistent due to the traditional blackout period ahead of the Fed’s next meeting on December 13 & 14. The earnings calendar will be relatively quiet with just 7 members of the S&P 500 scheduled to report results. On the political front, the US Senate run-off election in Georgia will take place on Tuesday. However, unlike two years ago, the result won't determine overall control of the Senate, since the Democrats already have 50 of the 100 seats available, along with Vice President Harris' casting vote.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.