Post-Holiday Jitters From China Rattle Market Early On—Fed Speakers, Key Data Could Contribute Later

(Monday Market Open) Critical data resumes this week amid mounting concerns about China and sliding energy prices. Volatility jumped early Monday, so be prepared to hit the ground running if you’re trading. Things could move fast.

By now, Q3 earnings are mostly over, so key economic reports and geopolitics will likely drive the market’s direction toward the end of the year. November employment data arrives Friday, and there will be plenty to watch on the road to those numbers.

As trading moves along, keep an eye on the mega-cap stocks, especially Apple AAPL. AAPL and other mega-cap and chip stocks fell Friday and could face more pressure today based on “zero-COVID” policy protests that spread throughout China over the weekend. The situation in China drives uncertainty, and markets don’t like uncertainty. AAPL was down 1.8% in premarket trading.

Chinese unrest could also have a negative impact on crude prices and the energy sector amid ideas that China’s economy might take a hit if protests deepen. WTI Crude (/CL) dropped below $74 per barrel at times in overnight trading, establishing a new low for 2022. It’s now down nearly 45% from its $130 per barrel spring peak as some of the supply concerns people worried about just haven’t come to pass. Energy stocks are moving lower this morning.

Later in the week, we’ll hear Fed Chairman Jerome Powell’s take on things in a speech he’s giving at 1:30 p.m. ET Wednesday in Washington, D.C., titled “Economic Outlook, Inflation, and the Labor Market.” Those topics are close to the heart for Wall Street, so don’t count out the chance of market moves as Powell speaks. Before that, Fed speakers are on the calendar starting today. Any type of hawkish tone out of the Fed could push Treasury yields higher after their long recent drop.

Morning Rush

• The 10-year Treasury yield (TNX) fell 3 basis points to 3.66%.
• The U.S. Dollar Index ($DXY) is down 0.4% to 105.54
• Cboe Volatility Index (VIX) futures ticked up from recent lows to just under 22.
• WTI Crude (/CL) dropped nearly 3% to $74 per barrel, setting new lows for 2022 in overnight trading.

From a technical standpoint, the long-term trend for major indexes still tilts lower, but one positive sign is a recent trend toward higher lows and higher highs. The S&P 500 Index® (SPX) is showing some signs of consolidation, Briefing.com observed, as it approaches the 200-day moving average of 4,056,

Week Ahead

Last week’s Federal Reserve minutes—pinpointing the Fed’s thinking at the start of November—indicated that Federal Open Market Committee (FOMC) members were contemplating slower rate increases for the December 13-14 meeting.

Whether such considerations become reality will likely have a lot to do with the indicators we see this week:

Clocking In: Let’s begin at the end of the week with Friday morning’s nonfarm payrolls report. It’s expected to show considerably cooler November jobs growth of around 200,000, according to an early consensus from Briefing.com. We’ll see if that assessment holds as the week advances. Keep in mind that recent monthly jobs reports have tended to come in “hotter” than analysts expected, which is another way of saying that stubbornly high wages have not done much to help the Fed’s inflation fight. October’s jobs growth was very strong at 261,000.

The question now is whether recent corporate layoff announcements we’ve been hearing about are starting to show up in the data.

Assembly Line: November’s Chicago PMI report on Wednesday morning, and November’s ISM Manufacturing Index on Thursday morning, could offer updates on industrial health and will be closely watched. Investors want to see how healthy the manufacturing economy is here and overseas after last week’s soft IHS PMI number appeared to weigh on both Treasury yields and the dollar. Weakness in either of these key PMI reports could do the same.

Price Check: If there’s any report this week that challenges Nonfarm Payrolls for primacy, it could be Thursday morning’s October Personal Consumption Expenditure (PCE)prices. That’s an inflation report closely watched by the Fed, and investors should check to see if it backs up the milder inflation shown by October’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Slower inflation could mean the Fed is more likely to moderate future rate hikes. 

The Big Picture: The government’s second estimate of Q3 Gross Domestic Product (GDP) bows on Wednesday morning. Consensus is for growth of 2.7%, equal to the first estimate. A higher-than-expected estimate might drive ideas that the economy isn’t cooling down as quickly as the Fed would like. A lower number might also cause hand wringing among investors, who could worry it indicates a pending recession. Something in the ballpark of that estimate might be welcome.

Tomorrow morning, we’ll see the November Consumer Confidence report. Consensus from Briefing.com is for a headline figure right on the 100.0 mark. That would be a slight retreat from 102.5 in October, but still up solidly from summer lows. One thing to watch is one-year inflation expectations, which were 7% last month, up from 6.8% in September. Any change here could help pinpoint how much price pressure consumers feel.   

On the earnings side, there’s not much to chew on early this week, though things pick up a bit on Wednesday with a couple of big tech names. Synopsis (SNPS) and Salesforce (CRM) are expected to report that afternoon. Thursday brings Dollar General (DG) and Kroger (KR). Tidings from KR in particular could be worth checking for any updates on their proposed purchase of Albertsons (ACI).

Earnings season is 97% complete, and Refinitiv expects Q3 S&P 500 earnings growth of 4.3%. That sounds decent until you strip out the energy sector, at which point earnings would be down 3.5%. And as Charles Schwab’s Managing Director and Chief Investment Strategist Liz Ann Sonders pointed out recently, earnings season showed a breadth of hits in terms of industries—with not only technology feeling the pressure, but also housing, autos, and communication.

Reviewing the Market Minutes

Mega-caps were mostly lower Friday, and that had a negative impact on several of the major stock indexes. AAPL,known as a market bellwether, gave up 2% as worries about iPhone production in China grew. Reuters reported Friday that iPhone production in November at an AAPL plant affected by protests could be cut by at least 30%. AAPL’s performance can often hint at where the broader market goes, so watch for any additional weakness in that stock this week.

Here’s how the major indexes performed Friday.

• The Dow Jones Industrial Average® ($DJI) rose 152.97 points, or 0.45% to 34,347.03. 
• The Nasdaq Composite® ($COMP) fell 0.52% to 11,226.36.
• The Russell 2000® (RUT) climbed 0.38% to 1,870.69.
• The SPX fell 0.03% to 4,026.12.

Talking Technicals: The U.S. Dollar Index ($DXY) hung around just above 106 for most of the shortened day Friday. For the moment, it stayed above a key support level at the 200-day moving average of 105.1. While moving averages aren’t always necessarily critical on the charts, in this case the 105 level does seem to be influential. It marks a spot where the $DXY rebounded back in early August and also formed a resistance area back in May and June (see chart below). 

CHART OF THE DAY: GREENBACK SHOWS RED. The U.S. Dollar Index ($DXY—candlesticks) sits just above its 200-day moving average (lower blue line) of 105.1 The $DXY hasn’t spent much time under 105 since May, and its strength since then has been a constant source of pressure on the stock market. This is the longest $DXY stretch above 100 since 2002. A few weeks ago, the dollar’s drop below its 100-day MA was followed by a quick drop to much lower levels and accompanied by strength in the stock market. Data Source: ICE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking Cap

It may not be appetizing to consider, but your portfolio almost certainly has some, or possibly a lot of, red numbers during the last 11 months. Despite some upward progress recently from last month’s nearly two-year low, the SPX remains down about 16% for the year to date with only one month left in 2022. 

Amid the wreckage, investors face multiple potential decisions going into 2023: hold on to losers; throw them back for possible tax-loss harvesting; or decide if certain stocks out there are low enough to snap up?

For answers, start by:

• Checking the charts. Say the stock you’re following is down 50% from a year ago. Does it look like shares are starting to build a base they can rally from? Have your shares shown more resilience in recent weeks or months?
• Taking a look at the stock’s relative strength indicator versus a related index to get a sense of how it’s performing versus its sector or the overall market (not to be confused with the Relative Strength Index, which is a momentum oscillator).
• Asking questions on the fundamentals side. Has the company done what’s needed to get back on track? For instance, retailers struggled with margin-crushing inventory levels in the second half of the year. But if these companies start making progress on such backlogs, it could be a signal that things are turning around

On the other hand, a lot of investors rightly fear being caught in what’s known as a value trap—stock prices that look like a buying opportunity but still have considerably more distance to fall.  If you’re still feeling uncertain, it might be better to wait for more information in mid-January when Q4 earnings season begins. You’ll see many companies update their 2023 outlooks, which could indicate whether more pain is ahead.

Notable Calendar Items

Nov. 29: November CB Consumer Confidence and expected earnings from Hewlett Packard Enterprise (HPE)

Nov. 30: Chicago PMI, October Pending Home Sales, Q3 Gross Domestic Product (second estimate), and expected earnings from Hormel Foods (HRL) and Salesforce (CRM)

Dec. 1: October Construction Spending, October Personal Consumption Expenditure (PCE) prices, November ISM Manufacturing Index, October Construction Spending, and expected earnings from Kroger (KR)

Dec. 2: November Nonfarm Payrolls and expected earnings from Cracker Barrel (CBRL)

Dec. 5: November ISM Non-Manufacturing Index and October Factory Orders

Dec. 6: October Trade Balance and expected earnings from AutoZone (AZO) and Casey’s General (CASY).

Dec. 7: October Consumer Credit and expected earnings from Campbell Soup (CPB).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

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