by Bryan Perry

November 22, 2022

Something special happened for the bulls last week. First, a little background. For the greater part of 2022, any headlines that alluded to the Fed being more aggressive than the current mindset of the market were met with “sell first, ask questions later,” taking the major market averages to fresh lows.

From the 1-year chart below, there is a well-defined downtrend line that catches the previous top of the past two rally attempts to snap the bear trend (in April and August), and failing to do so each time.

Standard and Poor's 500 One Year Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That downward-sloping straight line currently comes into play right at 4,100 for the S&P 500 and is the next technical battleground for the bulls in their quest to take the high ground. Looking at the 10-year chart for the S&P, the 50-week moving average is still rising, with the index successfully testing this trendline at 3,500 and rebounding from there to 4,000, followed by some technical selling pressure and some very hawkish commentary last week by St. Louis Federal Reserve President James Bullard.

Standard and Poor's 500 Ten Year Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In a well-reported speech, Bullard cited the “Taylor Rule” in his new base case for the Fed Funds Rate (FFR) to reach as high as 7% in order to be “sufficiently restrictive” to combat inflation. Although Bullard didn’t throw out any numbers, his chart of the Policy Rate and Taylor Rules did all the talking:

The Sufficiently Restrictive Zone Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This chart presented brand new information for even the most professional investor, who had to quickly research what the Taylor Rule says exactly. To be sure, it is a common rule of thumb that shows just how high the FFR would need to be to create enough unemployment to bring inflation down to the targeted 2% level. The inflation rate was 7.7% in October after reaching 8.2% in September. While one month doesn’t make a trend, the market embraced the drop, sending the S&P higher by over 7% in four sessions

The fact that the S&P and, more impressively, the NASDAQ, didn’t fall through a trap door under the weight of Bullard’s comments was, in my opinion, remarkable. After rallying 10% off the CPI data, the NASDAQ gave back only 3% by last Friday against what would be considered a bombshell of Fedspeak from a Fed spokesman who is considered by some to be the second most influential Fed official behind only Jerome Powell. Personally, I found the market’s ability to shake off his rhetoric very impressive.

The market seems to be at a crossroads in terms of the outlook for the economy in the current quarter, including whether inflation will tick lower again for November, the health of labor markets, commodity prices – specifically crude oil – and the ongoing war in Ukraine, which could take a turn for the better or worse. And then there is the all-important outlook for the fourth-quarter GDP, which the Atlanta Fed has pegged at 4.2%. That’s pretty good after five rate hikes, four of them of the jumbo variety at 75 bps each.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 4.2 percent on November 17, down from 4.4 percent on November 16. After this morning’s housing starts report from the US Census Bureau, the nowcast of fourth-quarter real residential investment growth decreased from -7.6 percent to -11.7 percent.”

Atlanta Fed GDPNow Estimate for 2022 Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since the Fed has said it is “data dependent,” let us recall that Black Friday sales figures will be out next Monday, and Wall Street will also be super-focused on these following statistical releases.

November 23 – Durable Goods Orders for October and Initial Jobless Claims for the latest week.
November 30 – Chicago Purchasing Manager Index (PMI) for November
December 1 –    Personal Consumption Expenditures Price Index (PCE) for October
December 2 –   Nonfarm Payrolls for November
December 9 –   Producer Price Index (PPI) for November
December 13 – Consumer Price Index (CPI) for November

In addition, there are several other economic data points in between these, leading up to the next FOMC meeting scheduled for December 16, but these are the reports that will influence market sentiment the most. Until this parade of data points is released, it’s anyone’s guess whether last week’s bullish relative strength in the face of unusually high Fed verbosity is a harbinger of good things to come. But the price action was encouraging, especially among a number of leading growth stocks, and that’s worth noting.

The market will likely pivot well before the Fed does, and this is where investors are hungry to see that inflection point where the inflation data ebbs for a second straight month, the job market softens, bond yields remain off their recent highs, the dollar holds steady well off its highs, and commodity prices don’t spike higher. Against this set of conditions, the S&P 500 has a chance to take out resistance at 4,100.

It feels like investors sense this could be a setup for an upside breakout, being it is a seasonally good time to be long stocks. A lot of what is outlined has to go right for this scenario to play out, but the market seems to be buying into an economic slowdown versus a recession. And in this case, a year-end rally might be in the making, as it would take a lot of people by surprise – especially those with a lot of cash.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Watch the Bond Market

Sector Spotlight by Jason Bodner
Headlines Say One Thing – Investor Action Says Another

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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