Stocks slipped this morning as 2022’s final week of trading got underway. The Dow traded flat through noon, while the S&P and Nasdaq Composite endured moderate losses. China-sensitive stocks gained in response to Beijing’s newly loosened Covid restrictions, but some names – Tesla (NASDAQ: TSLA) in particular – didn’t join in on the fun.
Southwest (NYSE: LUV) shares also slumped lower due to mass flight cancelations over the last few days.
Today’s choppy morning session dipped into the red once yields started climbing. The 10-year Treasury yield advanced to 3.84%, notching a 40-day high. Rising long-term yields imply that the market has grown increasingly nervous about whether the Fed will cut rates next year.
“The biggest worry for many traders and investors is how far the Fed will go with its interest rate and how much adverse influence it will have on the U.S. economy,” said AvaTrade analyst Naeem Aslam.
“From their tone, it is very much clear that the Fed isn’t afraid of continuing their process of hiking interest rates, and recession remains the least concern for them as they want to bring inflation lower at any cost.”
Other analysts were hopeful that the end of “zero-Covid” in China – announced just yesterday – could provide support to falling stocks.
“Amid the very real possibility of recession in Europe and America and fears about overtightening by the Fed, the return of strict lockdowns in China in recent weeks had added to the doom and gloom around the outlook,” said XM investment analyst Raffi Boyadjian.
“And even though it’s likely that it will take a few weeks for Chinese consumers to start spending again and for the supply disruptions to abate due to the current high infection rate, this latest development has lifted the uncertainty about zero-Covid making a possible comeback, buoying risk assets.”
Conversely, an economic reopening in China has put oil prices back on an upward trajectory. Oil continued its rally today, and if oil goes much higher, concerns about rising gas prices could impact the inflation conversation.
Which, in turn, would keep the Fed hawkish despite a recession in the US.
But with most major trading desks closed until the new year, it’s unlikely that any major moves will emerge over the next handful of trading sessions. Or, if they do, the price gains/losses will be temporary.
That didn’t stop some analysts from hoping for a major Santa Rally to finish out the year. When the S&P drops less than 10% on the year, it has historically done better over the following year than if it had fallen more than 10% in the year prior. Currently, the index is down over 19%.
In order for the S&P to break above the 10% threshold, it would’ve had to rally to 4,300, or roughly 12% from its current price level, by Friday.
That kind of move is seemingly impossible at this point.
“When the index is down in the double digits as it is today, the odds of it being positive next year is essentially a coin flip and the returns aren’t nearly as promising as they would be if the S&P ended down less than 10%,” wrote DataTrek’s Jessica Rabe in a recent note.
“If there had been a real ‘Santa Claus Rally’ this month, the S&P might have ended the year with less than a double-digit decline.”
And though 2023 may be a “coin flip” to some, most investors anticipate, at the very least, a bearish start to the year. That’s because stocks will continue to fall until the Fed changes its tune on rates, which probably won’t happen any time soon based on Powell’s recent comments and the bank’s revised median rate (5.1%) for 2023.
