Stocks collapsed today in response to a “1-2 punch” of bearish economic data. The Dow, S&P, and Nasdaq Composite opened significantly lower before cratering through noon. Every sector was hit by the selling.
Sentiment took a nosedive after the release of a disappointing retail sales report, which came out right alongside an unexpectedly low weekly jobless claim tally. Retail sales declined by 0.6% in December, far exceeding the -0.3% month-over-month estimate, confirming to many analysts that the Fed would continue to raise rates into a stiff recession.
Year-over-year (YoY), retail sales were up by 6.5%, roughly 0.6% below November’s +7.1% YoY Consumer Price Index (CPI) reading. That means real retail sales (adjusted for inflation) contracted (-0.6%) in annual terms last month.
“With weak global growth and the strong dollar compounding the domestic drag from higher interest rates, we suspect this weakness is a sign of things to come,” wrote Capital Economics economist Andrew Hunter.
Weekly jobless claims intensified the pre-market pessimism when the Labor Department said first-time unemployment filings fell to 211,000, well below the 232,000 job estimate.
Bulls took this news poorly after Fed Chairman Jerome Powell repeatedly harped on the strength of US labor in his post-FOMC comments yesterday afternoon.
A stubbornly “hot” jobs market would be bad enough on its own. But a retail sales contraction and strong US labor? That’s the complete opposite of what the market wanted to see, and it suggests that the Fed will drive rates higher no matter how much the US economy begs for mercy.
“People assume earnings are going to come down, but it’s the magnitude of that decline and how fast it’s going to happen — we think that is where the surprise is,” said Morgan Stanley strategist Mike Wilson in a CNBC interview this morning.
“That negative operating leverage that we see from that falling inflation […] is what is going to hurt margins, and that’s irrespective of whether there is an economic recession.”
Wilson has been the market’s most accurate analyst (and biggest bear) in 2022 alongside Bank of America’s Michael Hartnett. Both predicted a rough year for stocks back in November 2021. They also thought an early “Santa Rally” would begin in late October (as did we) and fizzle ahead of Christmas.
Now, the pair of iconic bears believes the first half of 2023 will see shares go even lower as part of a major bear market continuation – another prediction we’re completely on board with – prior to a Fed “surrender” heading into the second half of the year.
Since the Fed raised its median rate yesterday for 2023 to 5.1%, however, the odds of that happening have fallen considerably.
Thankfully for bears, we’re nowhere close to Hartnett and Wilson’s predicted bullish shift. And, as investors continue to digest the grim reality of things, it’s probably going to get a whole lot darker before the dawn (when the Fed starts cutting rates). Today’s jobless claim data and retail sales revelation indicated that as well, breaking up the longer-term bull narrative in the process.
