Getaway Day? Holiday Slowdown Beginning, But Key Inflation, Housing Data Ahead

(Wednesday Market Open) It’s the shortest day of the year, so maybe market participants are trying to make up for lost time.

After breaking a four-day losing streak yesterday, major stock indexes gained more ground early Wednesday amid a slight drop in Treasury yields and a decent batch of earnings from FedEx (FDX) and Nike (NKE).

A bit of the rally in bond yields after the Bank of Japan (BOJ)’s hawkish announcement is unwinding this morning, showing yesterday’s moves were probably overdone. We’ll watch to see if the 10-year Treasury yield (TNX) can fall back to 3.6%, the top of a longer-term recent range. The dollar is softening, yields are moving lower, and the Cboe Volatility Index® (VIX) is now below 21.

As long as the VIX remains in the low 20s it shows there isn’t a lot of concern about a massive swing one way or the other in the markets.

Yesterday’s solid earnings are instilling a little confidence that the stock market can regain some of its recent losses. The level to watch for the S&P 500® index (SPX) is 3,850, and above that 3,900. If the SPX can finish the week between those levels, it might be a positive sign going into the final week of the year, when stocks historically have shown strength.

What we saw earlier this week is that when there’s bad news like the recent Federal Open Market Committee (FOMC) meeting, the SPX gaps down toward that 3,800 level. Bulls would like to see it maintain 3,850.

Morning Rush

• The 10-year Treasury yield (TNX) stepped back two basis points to 3.66%.
• The U.S. Dollar Index ($DXY) is steady at 104.03.
• Cboe Volatility Index® (VIX) futures fell sharply to 20.75.
• WTI Crude Oil (/CL) rose again to $77.86.

Potential Market Movers

Semiconductor chipmaker Micron (MU) is expected to report after the close today, followed by CarMax (KMX) tomorrow. That wraps up earnings for the year, with no major companies expected to report between Christmas and New Year’s.

The consensus view on MU is for a quarterly earnings per share (EPS) loss of $0.02 compared with year-ago EPS of $2.16. Analysts look for revenue of around $4.16 billion. MU shares are down more than 40% this year, worse than the 35% drop in the PHLX Semiconductor Sector (SOX). For MU, it comes down to the basics of declining demand and rising supply, one analyst recently told Barron’s.

Weakness in personal computers and smartphone demand has hurt MU, and now the cloud industry is also slipping. MU executives have said they expect improving fundamentals by next spring. We’ll see if they add more insight during their conference call scheduled for 4:30 p.m. ET today, and keep in mind, the semiconductor industry is often seen as a useful barometer of both consumer and business health.

• FDX is also seen as a barometer, especially this time of year when so many people send holiday packages. Well, the weakening economy apparently made things tough for the package-delivery firm, which reported revenue that came in below Wall Street’s consensus and also offered full-year EPS guidance short of analysts’ expectations.
• Revenue and EPS in the company’s fiscal second quarter fell from a year earlier, and shares are down 36% year to date. But the company did beat analysts’ bottom-line estimates and promised to cut costs, which seemed to do the trick for market participants, who sent shares up 4% in premarket trading.
• In its press release, FDX said fiscal Q2 results “were constrained by continued demand weakness, particularly at FedEx Express.” It cited increased purchased transportation rates, lower package volume, and higher other operating expenses. International and domestic express daily package volumes declined about 12% year-over-year, while the ground business fell 9%.
• News was quite a bit better in the athletics department late Tuesday as NKE posted a winning quarter. Revenue and EPS easily beat analysts’ estimates and shares popped about 7% in post-market action. Strength in NKE, if it persists, could give the Dow Jones Industrial Average® ($DJI) a boost today because NKE is a component.
• NKE’s China sales remained in the red, but it outperformed in North America where sales rose 30%. NKE took a slight hit to gross margin, but that could be seen as constructive if it helps the company put inventory issues behind it.

Data Potpourri

Thursday morning before the open brings weekly initial unemployment claims, along with the final government reading on Q3 Gross Domestic Product (GDP). Those are followed early Friday by:

• December Consumer Sentiment
• November New Home Sales
• November Durable Orders
• November Personal Consumption Expenditure (PCE) prices

The Wall Street consensus for final Q3 GDP is 2.9%, unchanged from the prior government estimate. Analysts expect initial jobless claims of 225,000, according to research firm Briefing.com. Keep an eye on continued claims, which have been creeping up lately and may be showing the impact of the many layoffs seen in recent weeks. Continuing claims were 1.67 million in the previous report.

The PCE data might be the biggest one to watch. Consensus on Wall Street now is for a 0.3% rise. This is the inflation indicator the Fed most closely follows.

Shortly after today’s open, we’ll get a look at November Existing Home Sales.

The Wall Street consensus, according to Briefing.com, is 4.2 million on a seasonally adjusted basis, down from 4.43 million in October.

One metric to watch is median home prices, which climbed 6.6% in October and were up for the 128th month in a row—a record. Any sign of moderation in prices might receive applause from Fed watchers because rising home values exacerbate the “wealth effect” that can lead to heavier consumer spending and potential inflation.

Reviewing the Market Minutes

The four-day losing streak ended Tuesday but not in a convincing way. The SPX barely rose, finishing just 0.1% higher. It did claw back for the second day in a row after dropping briefly below 3,800 early on but didn’t show much late-day resilience the way it had Friday and Monday. It just chopped around much of the session before finishing barely above a key technical support level at 3,819. Volume was lower than average, implying not much conviction behind the gains.

Tuesday would probably have been even less impressive without energy, which powered most of the gains for major indexes as WTI Crude (/CL) climbed to nearly $77 per barrel at one point. Some of the energy stocks carrying along the SPX with nice gains include Chevron (CVX), ConocoPhillips (COP), ExxonMobil (XOM), and Schlumberger (SLB).

The SPX Energy Select Sector Index (IXE) is up 53% year to date. The next best SPX sector performer is the SPX Utilities Select Sector Index (SIXU), which is down 3% year to date. If you think the stock market has had a bad year, try to imagine where it’d be without energy’s contribution.

Bonds have also had a terrible year, and it got worse Tuesday. The Bank of Japan’s decision this week to allow its benchmark yield to trade as high as 0.5% (up from the previous 0.25%) got a hawkish response from the markets, and bonds fell sharply. The benchmark U.S. 10-year Treasury yield climbed to 3.68% yesterday, up 28 basis points from its December low and the highest it’s been since November 30.

Meanwhile, shares of Tesla (TSLA) skidded another 8% yesterday, leading to sharp losses for the SPX Consumer Discretionary Select Sector ($IXYNTR). That sector is now down 17.2% over the last three months and didn’t share in the widespread November rally.

Here’s how the major indexes performed Tuesday:

• The $DJI rose 92 points, or 0.28%, to 32,849.
• The Nasdaq® ($COMP) climbed 0.01% to 10,547.
• The Russell 2000® (RUT) finished 0.54% higher at 1,748.
• The SPX rose 3.96 points, or 0.1%, to 3,821.

Did you know, by the way, that Charles Schwab delivers an end of the day market update podcast each day after the close? Be sure to check it out.

Talking Technicals: The RUT (see chart below) has been sagging more lately than its large-cap counterpart (the SPX) in part due to high interest rates that can wear down shares of smaller companies more dependent on financing their growth. From a technical perspective, the latest round of selling occurred after the RUT tested and failed to climb above a downtrend line on the charts now near 1,875 early this month. The RUT then collapsed below both its 200-day and 100-day moving averages and has fallen under the 50% retracement level of the October-to-early December rally (near 1,770).

By Tuesday, the RUT was flirting with support levels in the 1,738-to-1,750 range, and we’ll see if it can hold on. A key support point could be 1,724, which represents the 78.6% Fibonacci retracement level of the June-through-August rally.

CHART OF THE DAY: SMALL-STOCK SAG. The recent downturn on Wall Street hit the Russell 2000 Index (RUT—candlesticks) harder than it did the SPX (purple line). This could reflect that small-caps—which often need to borrow money to grow—can be more sensitive to higher interest rates than large-caps. Data sources: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

This is the last full work and market week of 2022, so it seems fitting to check in and see what analysts expect for 2023. Hopefully, you’ve already read my 2023 Outlook and also checked out the Charles Schwab Market Outlook Podcast to get the full range of views on stocks, bonds, and other metrics.

Barron’s surveyed eight well-known analysts from all over Wall Street, and these are the ranges they’ve predicted for various benchmarks next year:

3,930 – 4,800: Nearly all eight analysts surveyed by Barron’s gave their end-of-year 2023 SPX estimates. They ranged from 3,930 (barely above current levels) all the way to 4,800, which would be in the vicinity of the early 2022 all-time high. It’s fair to say that these analysts are all over the map, but it’s interesting to note none of them expects the SPX to be lower a year from now than it is today.

$199 – $231: That’s where Barron’s analyst panel sees estimates for 2023 S&P 500 EPS compared with 2022’s S&P 500 EPS average Wall Street estimate of near $220. Considering half the analysts Barron’s surveyed expect 2023 EPS to be below the 2022 estimate, that’s not exactly bullish. If the more bearish participants are correct, it may mean that current stock valuations could start looking pricey, ultimately meaning that the price-earnings (P/E) numerator could fall along with the denominator. 

3.75% – 5.25%: That’s the rather wide range Barron’s analysts see for the year-end 2023 federal funds rate target range. The Fed’s current target range is 4.25% and 4.5%. However, only one analyst said they expect the range to actually top 5% a year from now. Most see rates close to current levels in a year, perhaps because they feel the Fed will have to step back from its own estimated terminal, or peak, rate of between 5% and 5.25% before year-end.

As everyone knows, predictions are seldom right on target, but they offer food for thought.

Notable Calendar Items

Dec. 22: Government’s final Q3 GDP estimate and expected earnings from CarMax (KMX)

Dec. 23: November Durable Orders, November Personal Income and Spending, November PCE Prices, November New Home Sales, and Final December University of Michigan Consumer Sentiment

Dec. 26: Markets closed for official Christmas Day holiday. Enjoy if you celebrate!

Dec. 27: December Consumer Confidence

Dec. 28: November Pending Home Sales

Dec. 29: Weekly Initial Unemployment Claims

Dec. 30: December Chicago PMI

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

Image sourced from Shutterstock

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