Stocks, Bonds, Trade Sideways, On Mixed Economic And Earnings Data -- What's Next?
Amid mixed economic and earnings data and hawkish speeches, Fed officials tempered investor enthusiasm for buying bonds and stocks last week, ending the solid rally of the previous week.
All major U.S equity indexes finished the week where they began, with S&P 500 and Nasdaq posting fractional declines and the Dow Jones Industrials remaining unchanged. In addition, the benchmark 10-Year Treasury bond rose fractionally in yield to close at 3.82%.
Early in the week, another dose of good inflation news encouraged equity and debt market bulls to keep buying stocks and bonds. The October Producer Price Index (PPI) came out better than expected, in line with the Consumer Price Index (CPI) released last week.
The two broad measures of price hikes around the nation confirm that inflation is easing, renewing talk of an end to the Fed interest rate hikes.
But this time, a string of hawkish speeches by Fed officials tempered the enthusiasm of Wall Street bulls.
Kansas Fed President Esther George, a voting member of the FOMC, reminded markets that inflation could not come down in the face of tight labor markets.
San Francisco Fed President Mary Daly elaborated what that means for monetary policy: no rate hikes pause until the tight labor market conditions ease.
St. Louis Fed President James Bullard, another voting member of the FOMC, noted that "the policy rate is not yet in a zone that may be considered sufficiently restrictive," meaning interest rates will continue to head higher.
"Bullard's comments gave a jolt to the market," Jay Woods, chief market strategist at DriveWealth, told International Business Times. "The 5% inflation rate looks more like the floor when many thought it was the ceiling."
Then there were mixed financial reports from retailers, adding to the market stalemate. For instance, Walmart, Macy's, and TJX beat market expectations, while Target lagged.
And there was news of a weakening housing sector, which gave markets another jolt. In October, new home starts and permits dropped at an annual rate of 8.8% and 10.1%, respectively.
"The inventory of existing homes for sale remains tight," Ryan Johnson, Director of Portfolio Management and Research at Buckingham Advisors, told IBT. "And while the median home price is still higher than a year ago, the volume of sales in October dropped 5.9% from September and dropped over 28% from a year ago."
Weak housing numbers revived talk of the U.S economy heading into a recession, which is not a good scenario for equities. Corporate earnings fall during recessions, driving equity valuations lower.
Still, a recent report out from FactSet finds that S&P 500 companies are less worried about a recession in the third quarter earnings calls thus far.
"Even though the final number of companies citing 'recession' for the third quarter will likely finish higher than 179 (with 6% of the index yet to report actual results for the third quarter), it will not finish above the previous quarter's number of 242," said John Butters in a company blog.
What's next for stocks and bonds?
First, Woods sees interest rates continue to haunt retail investors.
"The market wants to see a pullback on rates, but the Fed doesn't seem ready to do that," he said.
Second, he's concerned about record-high consumer debt.
"While we're seeing the market stabilize with other positive data, this is a big storm cloud forming over the first quarter of 2023."
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