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Profit from the Pros By Kevin Matras Executive Vice President
Stocks Lower On Monday, Inflation And Employment Reports Due Later This Week
Stocks closed lower yesterday to start the week.
Reports of more Covid unrest in China, with lockdowns and protests, weighed on stocks in China. That spilled over to the U.S. markets yesterday.
Brief hopes a couple of weeks ago that China would loosen Covid restrictions, and therefore see their economy strengthen because of it, were short lived. And now questions over China's growth outlook have resurfaced.
The market is also watching the possibility of a rail strike here in the states. Of the 12 unions involved in negotiations, 8 have signed off on their packages, while 4 have not. They are still negotiating. And lawmakers are working to avoid a strike. The deadline for an agreement is December 9th.
In other news, yesterday's Dallas Fed Manufacturing Survey improved from -19.4 to -14.4, and beating the consensus for -20.5.
Today we'll get the Case-Shiller Home Price Index, the FHFA House Price Index, and Consumer Confidence.
But the 2 main events this week will be Thursday's Personal Income and Outlays report, where we'll see what the PCE (Personal Consumption Expenditures) Index comes in at, which is an inflation gauge looked at by the Fed.
We'll also get Friday's always important Employment Situation report. The Fed has been watching this closely as well. While the hot labor market shows the resiliency of the economy, it also shows that the economy (and possibly inflation), could remain elevated.
The Fed meets again on December 13-14, and will make their decision on how high to hike rates. It's widely believed they will slow their pace down from 75 basis points (which is what they've hiked in each of their last 4 times out), to 50 basis points. The market is also hoping for language as to when they will finally stop and wait to see how their policy impacts inflation, the economy, and employment.
The Fed wants to reduce inflation, but they also have a mandate for full employment. And they'd prefer to engineer a soft landing rather than a recession. Since rate policy is lagging (it takes a while to see its effects), there will need to come a time where they stop raising and just sit tight to see how their policy moves are working.
While the FOMC Announcement is 3 weeks away, this week's reports could influence the Fed's decision. So all eyes will be on those reports later this week.
In the meantime, stocks have been doing well over the last month and a half. Earnings season helped (stocks usually go up during earnings season). And Q4 is typically the best quarter for stocks. Moreover, the post-midterm effect on the market is positive as well (since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%).
This bodes well for an end-of-year rally, and a strong start to 2023.
But inflation, interest rates, and the pace of the economy remain key factors in the markets right now. And those will help shape what the market looks like going forward.
See you tomorrow,
Executive Vice President, Zacks Investment Research
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