U.S. stocks extend sell-off; Nasdaq down >3%
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All S&P sectors red: tech, cons disc hit hardest
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Dollar gains; gold, crude, bitcoin fall
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U.S. 10-Year Treasury yield edges down to ~3.67%
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KEEP YOUR EYES ON THESE KEY METRICS IN 2023 (1330 EST/1830 GMT)
As markets head into the final week of the year, Mike O'Rourke, chief market strategist at JonesTrading, is taking a look at what he thinks will be some important metrics to watch in 2023.
According O'Rourke, in order for the Fed to potentially take their foot off the rate-hike pedal, the unemployment rate needs to rise from its five decade lows.
O'Rourke notes that with the exception of the tech industry, businesses seem reluctant to layoff workers. Thus, he says that it will be important to have a heightened focus upon weekly initial jobless claims. A significant increase in claims will likely be necessary before unemployment rises to a level that satisfies the Fed.
Another important factor for O'Rourke is the real policy rate or real Fed funds rates, which is calculated by subtracting Core PCE inflation from the Fed Funds rate.
O'Rourke says that the FOMC is on pace to get to a positive real Fed Funds rate in 2023 through rate hikes.
The other half of the equation is Core PCE inflation, which should begin to decelerate, but as Powell indicated, it may take some time. As inflation decelerates, the real Fed Funds rate will move further into positive territory.
O'Rourke says that monitoring this relationship throughout 2023 will provide insight as to whether Fed tightening needs to continue, or if the FOMC will consider a pivot toward easing, if inflation decelerates quickly.
Finally, O'Rourke says that he has long been concerned about the equity market hitting bubble valuations beyond those hit in 2000, when one compares the S&P 500 market capitalization to U.S. GDP. He says that market cap to GDP peaked at 121% in 2000, and the three decade average is 85%. He adds that, about one year ago, this metric peaked at 180%.
Throughout 2022, he notes that as the market has corrected sharply led by mega cap tech, the S&P 500 market cap to GDP has shrunk to 129%.
"That is a notable correction, but it is also a 6.7% premium to the 2000 bubble peak and a 50% premium to the three decade average. Progress has been made, but there is still a long road to travel."
SHOULD SANTA JUST STICK TO TOY DELIVERY? (1202 EST/1702 GMT)
While Wall Street talks a lot in December about the so-called Santa Claus rally and what it means for trading in the new year, Bill Stone, chief investment officer at Glenview Trust notes that the red-clad mythical hero is in reality not a perfect forecaster of what happens next in the market.
The Santa Claus Rally - as defined by the Stock Traders Almanac - is meant to take place during the last five trading days of the year and the first two trading days of the new year.
And according to the Almanac, if the market fails to rally in those days this tends to precede bear markets or "times when stocks could be purchased later in the year at much lower prices."
Still, Stone notes that, in the twelve years when there was a negative S&P 500 return for the Santa Claus indicator, the market was down only five times in the following year, which is a hit rate of about 42%.
All the same, the S&P's average 1.3% increase for those seven trading days since 1969 is better than the average performance for nine out of twelve months of the year since 1950, he notes.
Also, the S&P 500 is higher 77% of the time during the Santa Claus rally period, which is much higher than average.
Regardless of its forecasting ability, if the rally happens it should start this year on Dec. 23 and end on Jan. 4.
THURSDAY DATA: I LOVE IT, BUT DID YOU KEEP THE RECEIPT? (1000 EST/1500 GMT)
A one-two punch of solid economic data - ordinarily a cause for celebration - instead raised the specter of restrictive monetary policy overstaying its holiday welcome.
Taken together, the two reports paint a picture of an expanding economy and a robust labor market, despite the Fed's best efforts to toss cold water on the economy in its protracted battle against decades-high inflation.
The Commerce Department took its third and final stab at third-quarter GDP, surprising to the upside by revising it to 3.2% on a quarterly annualized basis, up from the 2.9% previously reported.
"Despite a rapid increase in interest rates, the economy is growing and importantly, households are still spending," writes Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "However, looking ahead, in 2023, we expect a slower growth trajectory although we are not forecasting a contraction in activity."
The Fed expects the same thing, having lowered its forward GDP estimates to a paltry 0.5% for the coming year.
Speaking of which, Farooqi adds "in terms of Fed policy, even as growth slows to a below-potential pace, a focus on lowering inflation means rates will remain higher for longer next year."
That is why upbeat economic news fails to prompt investors to pop the champagne these days - it suggests Powell & Co could keep the market's feet to the fire of restrictive policy for longer than many had hoped.
Digging into the data, trade, consumer spending and government expenditures contributed to the upside, while inventories and fixed investment dragged on the headline.
Of particular good cheer is the 6 basis point increase to the personal consumption element of the report, especially considering the consumer is responsible for about 70% of the U.S. economy.
But a closer look at consumer spending shows that services carried the day, outlays for goods - at least as a GDP contributor - played a negligible role.
Separately, the number of U.S. workers filing first-time applications for unemployment benefits inched up by 2,000 last week to 216,000, landing a bit below expectations.
Yes, Virginia - despite the fact that job openings are backing off record highs and a growing number of companies are announcing lay-offs, the jobs market remains tight.
The participation rate remains low, survey's reflect business owners' difficulty filling open positions - stoking the fire under wage inflation - and companies are still loathe to hand out pink slips.
But many expect the jobs landscape to grow increasingly cloudy in the coming year.
"Layoff activity tends to spike at the end of the year ... so low headline print claims should generally be viewed with some skepticism," writes Thomas Simons, money market economist at Jefferies. "Looking ahead, we expect that claims are going to trend higher over time, but only gradually so. Claims rarely move in a straight line for any significant length of time."
Ongoing claims, reported on a one-month lag, was essentially unchanged at 1.672 million, hovering just below the pre-pandemic 1.7 million area.
Wall Street veered sharply lower on the news, with interest rate sensitive megacaps weighing heaviest on the tech-burdened Nasdaq.
ESG IN VOGUE DESPITE TURBULENT YEAR (1000 EST/1500 GMT)
A flurry of business rulemaking and political backlash kept environmental, social and governance (ESG) issues in the news this year even as funds marketed as "sustainable" are on pace for their first annual outflows in more than a decade.
Their outlook for 2023 could be hinged on new-age investor "wokeness."
Sarah Hargreaves, head of sustainability for Commonwealth Financial Network believes trends such as the emphasis on stakeholder capitalism, the continual rise of investors' preference for passive ESG investments, and the generational wealth transfer to younger generations of Americans — who exhibit a greater propensity to invest according to their personal values and or with ESG-related objectives in mind —should continue driving growth and awareness in the space.
"At the end of the day, ESG investing seeks to provide investors with another arrow in the quiver to assess the financially relevant, non-financial risks of a company or industry."
Investors pulled a net $13.2 billion from ESG stock, bond and mixed-asset funds this year to end-November, based on Refinitiv Lipper data, the first net outflow since 2011 amid tumbling financial markets and a political backlash against the industry.
Even then, curiosity about the industry has continued to grow.
U.S. Google search volumes for "ESG" has surged over the last 5 years, with query volume this year on average 6x 2018/2019, 3x 2020 and nearly 2x last year, Jessica Rabe, co-founder of DataTrek Research said in a note last week.
In the coming year, it look like ESG rules will fast become mandatory rather than optional- starting with a 200 page guidance from the European Union expected in January to help market participants navigate its ESG legislation.
VIRTUAL THERAPY MAY NOT BE ENOUGH TO NURSE TELADOC'S WOUNDS (0927 EST/1427 GMT)
Once a pandemic darling, U.S. telehealth giant Teladoc Health has seen its fortunes dwindle as the world clawed its way out of a health crisis that had shuttered people indoors.
Shares of Teladoc, which counts Cathie Wood's Ark Invest as its top shareholder, have slumped as much as 71% this year, heading toward their worst year on record.
There are many reasons investors seem to have lost faith in the virtual healthcare services provider which saw earnings soar during the COVID-19 pandemic. The uncertain future of its mental health unit, BetterHelp tops the list.
Not only has the unit been plagued by mounting costs amid red-hot competition in the virtual therapy space, but it has also taken a hit from a slowdown in consumer spending driven by decades-high inflation.
Teladoc has cautioned that a worsening of macro pressures could crimp consumer spending further and weigh on BetterHelp, but in the meantime, a less-than-feared forecast cut in October appears to have allayed some investor fears.
So what's in store for TDOC in 2023? Jefferies analyst Glen Santangelo says that while the virtual therapy industry has continued to grow, its pace has moderated, potentially motivating TDOC to provide conservative guidance and manage 2023 expectations.
"We think FCF (free cash flow) is going to become an increasingly important metric for investors over the coming 12 months as investors largely expect the macro backdrop could worsen in 2023".
S&P 500 INDEX: TETHERED TO ITS 50- AND 200-DMAs (0900 EST/1400 GMT)
With its choppy action of the past month or so, the S&P 500 index has been struggling to pull away from its 50- and 200-day moving averages (DMA):
Indeed, with its December 13 intraday high, the benchmark index was only able to exceed its descending 200-DMA by at most 1.7% before it quickly reversed.
Then with Tuesday's intraday weakness, the SPX fell as much as 2% below its rising 50-DMA before it then reversed back to the upside.
Meanwhile, the spread between these closely watched intermediate- and longer-term moving averages ended Wednesday at about 144 points, or its tightest reading since May 13.
Back then, however, the 50-DMA was trending lower, while the 200-DMA was in the early stages of rolling over, and the SPX was trending down to fresh lows. This time, these moving averages are converging, while the SPX remains tethered to them.
Of note, the 50-DMA crossed below the 200-DMA back on March 14, signaling a "death cross." The 50-DMA has been below the 200-DMA ever since.
Meanwhile, at Tuesday's low, the SPX had retraced just over 50% of its October-December rally. Additionally, despite the most recent weakness, the index is still holding the 3,810-3,815 support zone on a daily closing basis.
With Wednesday's finish, the SPX closed at 3,878.44, or just decimals above its 50-DMA, which ended at 3,877.36.
Thus, traders will be watching for either more forthright weakness, which could then once again put the 50-DMA in gear with the 200-DMA to the downside, or whether the index can firm enough to see the spread between these moving averages narrow even further, setting up the potential then for a "golden cross" to develop.
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