Stronger-Than-Expected Data Results in Shift of Momentum
Equity markets fell last week as stronger-than-expected economic data weakened investor optimism that the Fed would slow its pace on interest rate hikes. Global equities (represented by the MSCI All Country World Index) were down -2.22%, and domestic stocks (represented by the S&P 500 Index) were down -3.35%.
Institute for Supply Management Services Index
The Institute for Supply Management’s (ISM) services index rose in November while expectations were for a small decline. The index bounced off the year-to-date low reading of 54.40 from October to 56.50 signaling a continued expansionary environment. The ISM pointed to an increase in business activity within real estate and food services that boosted the month’s reading.
The University of Michigan’s preliminary survey of consumer sentiment reading for December came in above expectations. While long-term expectations for inflation stayed near 3%, short-term expectations continued to fall to the lowest reading in 15 months. Short-term market recovery over the past few months helped to relieve fear and increase the sentiment reading especially within higher-income families.
Producer Price Index
The US Producer Price Index (PPI) released Friday moderated on an annual basis from October’s reading of 8.10% to 7.40% but still higher than consensus estimates of 7.2%. On a month-over-month basis, US PPI stayed little changed from the previous month with a 0.30% increase while expectations were for a 0.20% rise.
Even with equity markets erasing much of the gains from the previous few weeks, both equities and bonds have shown short-term relief from the beginning of October with the US 10-year Treasury yield retreating from its highs. Since the start of October, global equities have risen 12.21% and the Bloomberg US Aggregate bond index has risen 3.25%.
Consumer Price Index
The week ahead brings a new inflation report via the Consumer Price Index (CPI) and a Fed decision on the pace of the final rate hike of 2022. The CPI report will show if consumer inflation continued to moderate through November as it was recorded below consensus expectations on both an annual and monthly basis in October. The two-day Fed policy meeting concludes on Wednesday with markets expecting the seventh consecutive rate increase to their benchmark rate. A recent speech by Fed Chair Jerome Powell proposed the possibility that the Fed could slow the pace of rate hikes as early as this December meeting. The last four FOMC meetings resulted in 0.75% rate increases.
I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.
S&P 500: The Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Stocks in the Index are chosen for market size, liquidity, and industry group representation.
Russell 2000: The Russell 2000® Index is a capitalization-weighted index designed to measure the performance of the 2,000 smallest publicly traded U.S. companies based on in market capitalization. The Index is a subset of the larger Russell 3000® Index.
MSCI All Country World Index: The MSCI ACWI captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets
(EM) countries. With 2,937 constituents, the index covers approximately 85% of the global investable equity opportunity set.
GDP: Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
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