On the eve of the Fed’s decision, the case for stocks’ year-end strength is solidifying
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ToggleThis is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. The market is well on its way toward assuming disinflation is the new trend, and it’s now busy figuring out how this will interact with Federal Reserve policy and the ultimate economic growth picture for next year. The solid and broad downside surprise on t he November consumer price index triggered the anticipated upside pop in stocks. Though after the late-day Monday levitation, with the Fed decision Wednesday and the nearby presence of the S & P 500 resistance line just overhead, the rally has backed off. As noted in recent days, the market was coiling up pretty tightly, preserving most of the October-November rally and failing to break down, in anticipation of this week’s catalysts. Inflation declining from high levels has historically been a very positive dynamic for equity performance, and investors remain in a bit of a defensive stance, so the case for year-end strength is solidifying. The broader trend remains lower until further notice, but it has a shot to challenge it here. Of course, there is the Fed decision to get through. The bond market nudged lower its best guess for the terminal fed funds rate to under 4.9% after CPI. This could place the market in an apparent conflict with the consensus Fed outlook to be unveiled Wednesday, which might show the destination above 5%. (Such committee forecasts are apparently submitted before the meeting and thus before the CPI report). Perhaps this means Fed Chair Jerome Powell will push against the market’s looser view. But the data is cooperating more now than any time this year, so a more balanced message seems likely. Many are saying he doesn’t want to see financial conditions loosen much from here, but financial conditions are just a tool, not the job. Receding core inflation excluding rent is pretty dramatic and should enable the Fed to slow and perhaps soon pause. If they’re willing to. The furious rally in bonds has been a big relief to diversified investors and is rebuilding the traditional cushion that fixed income has played in portfolios. Remember all the alarm at the end of the third quarter about the “worst year-to-date loss for the 60/40 portfolio in decades?” Much less bad now, the ETF proxy for global 60/40, the iShares Core Growth Allocation ETF , broke its downtrend and the year-to-date total return is now a less awful decline of about 13%. I’ve been making the point that a very snug consensus has been forming around 2023 holding more risk than reward at least in the first half. The crowd is arguably over-extrapolating near-term recession and earnings-decline hazards in calling for a run toward or below the October S & P 500 lows before a round trip higher. It’s plausible but not at all assured. Ebbing inflation is now bolstering real wage income. Gasoline prices are down. Mortgage rates are well off the highs. This makes it a harder call to say growth will buckle imminently. One lesson of 2022 is that in the market, there is no single equilibrium where a given index level corresponds with a particular bond yield or gross domestic product number. Nominal GDP growth is still running in high single digits, plenty of revenue to gather there. Morgan Stanley chief U.S. equity strategist Mike Wilson called 2023 profit assumptions suspect because 85% of the S & P 500 is expected to have earnings at least 10% above 2019 levels. Well, U.S. nominal GDP is 15% above 2019 peak levels. All of which is to say, the range of outcomes for macro is wide. None of this makes the market look cheap, or even particularly encouraging from a leadership perspective . Nasdaq 100 growth giants outperforming on Tuesday’s lift is fine as a reflex, but it’s probably not the formula for a better 2023 setup. Homebuilders are ripping but broader consumer cyclicals, banks and industrials are quieter. They are not sending a bold signal about a reinvigorated economy. Market breadth has softened since the open, now 2:1 up:down volume. VIX is giving up most of Monday’s outsized pop in anticipation of the CPI crap shoot. After FOMC decision, it should deflate but wouldn’t bet against a whippy reaction to the final Fed meeting of a year which saw the most aggressive tightening action in 40 years.
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