Market Commentary: Week of December 12, 2022

Last Week

Both stocks and bonds decided to take the “glass empty” approach, last week. In the week prior to last, the markets took gloomy economic news as a sign that perhaps there will be an early pivot in 2023 monetary policy, even though the Chairman of the Federal Reserve, Governors on the Federal Reserve Board, and Presidents of Federal Reserve banks have repeatedly warned against dreaming of such a thing.

Last week, stocks took bad economic news and dismal economic projections as just straight bad news and sold off hard. Treasury bond yields rose a fair amount, perhaps as a nod toward actually listening to what the Fed is saying and doing as opposed to hoping for something different. The yield curve remains the most inverted it has been in 40 years.

I think this inversion of the curve, while severe, still looks like it is right out of the post-1980s excess-inventory-recession playbook which reads, the Fed will induce a recession through demand destruction (brought on by restrictive monetary policy), inflation will be whipped, and things will return to just right in a year or two. This is naïve. This inflation battle is one that hardly anybody trading in the markets has ever seen unless they are in their mid-70s.

Additionally, longer-dated yields simply do not reflect the Fed’s Quantitative Tightening and the lack of commercial bank and foreign demand for Treasuries. Too many huge buyers have left the field and aren’t coming back anytime soon in my opinion.

• The S&P 500 fell 3.36% for the week. The average daily move was 0.98%.
• The NASDAQ dropped 4% for the week. The average daily move for the week was 1.25%.
• The 2-year Treasury yield increased 8 basis points, closing at 4.35% on Friday. High year-over-year 4.72%, low yield .40%.
• The 10-year Treasury yield rose 9 basis points for the week, closing at 3.58% on Friday. Year-over-year high yield 4.24%, low yield 1.345%.
• The VIX Index jumped 20% for the week, closing at 22.83 Friday. Year-over-year high 36.45 and low 16.29.
• The MOVE Index increased 12% for the week, closing at 132.79 on Friday. Year-over-year high 160.72 and low 69.1.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads increased 2 basis points for the week closing at 80 basis points Friday. High spread Year-over-year high of 111 and low of 49.
• High Yield corporate debt (as measured by Markit CDX) increased by 16 basis points, closing at 479 basis points on Friday. Year-over-year high 627, and low 288.
• US Dollar Index rose 0.25% for the week closing at 104.81 on Friday. Year-over-year high 114.11 and low 94.79.
• WTI Crude plunged 11.2% using the January 2023 WTI Futures contract, closing at 71.02 Friday. Year-over-year high 123.70, and low 68.23.
• Gold, as measured by the February futures contract, was nearly unchanged for the week closing at 1,810 on Friday. High price for the front contract year-over-year is 2,043 and the low is 1,623.
• Bitcoin rose 0.6% closing at 17,113 on Friday. High price year-over-year 67,734 and low 15,731.

The Week Ahead

We come in this morning with stocks higher and Treasury yields a bit lower. We have a huge week in store for us. We get November CPI (following Friday’s higher-than-expected November PPI) on Tuesday, followed by the December FOMC meeting ending Wednesday with the meeting statement, and the always entertaining Chairman’s presser. Additionally, this meeting will contain a new Fed dot plot as well as the FOMC's latest economic projections.

It is nearly certain that the Fed will hike its policy rate by 50 basis points and keep the pace of Quantitative Tightening. The real potential market mover, other than Powell’s press conference where the market's wishful thinking interpretation of his words can take over, will be the dot plot. In September (the last dot plot), the median 2023 rate was 4.75%. This meeting the median is expected to be 5.25%. I really can’t see a consensus higher than 5.25% but if it is there will be blood. On the flip side, a median of 5% could give us a nice rally to head into the holidays with.

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.• The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.• 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.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve-weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Telecommunications. Markit CDX indices roll every 6 months in March & September.• The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.• The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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