Markets lost ground for a fourth-straight session this Monday, setting major indices on pace for its first down-December since 2018. The Dow sank another -163 points, -0.50%, and it was the best performer of the Top 4 on the day. The S&P 500 fell -0.91%, while the tech-heavy Nasdaq gave up the biggest losses of the majors, -159 points or -1.49%. This put the Nasdaq down nearly -7% over the past six sessions alone. The small-cap Russell 2000 dumped -1.41%.
The data out today wasn’t anything truly surprising to spark a downward turn; in fact, we have a 2023 narrative coming into view that the end of interest-rate adjustments higher are approaching, and fears we’ll be experiencing a deep recession next year have abated somewhat. But the process of pricing-out a Fed pivot on interest rates by mid-’23 — something the Fed threw a bucket of cold water onto last Wednesday — looks to continue, and we apparently have not struck resistance levels to the downside as of yet.
The National Association of Home Builders (NAHB) Index has now fallen lower every single month of 2022, with today’s December report underperforming expectations to 31 from 33 expected, and 34 reported in the November print. Even with mortgage rates cooling somewhat (to 6.3% from 7% at their peak), homebuilder sentiment continues to tumble further into contraction territory (sub-50). The Northeast was the best-performing sector, while the most expensive, the West, performed the worst for the month.
Meanwhile, we’re beginning to see a tightening of the inverted yield curve between 2-year and 10-year bonds — considered a strong indicator of a pending recession — from the 85 bps or so we were experiencing as of Wednesday last week to under 60 bps today: 4.26% on 2’s, 3.59% on 10’s. It’s still a wide inversion, even if its extended time as such has removed it somewhat from the conversation about a pending recession. Basically, keep this in mind: we’ve had yield-curve inversions without a recession, but we’ve never seen a recession without a yield-curve inversion.
If you’re really looking for a silver lining in this 2+ week selloff, here’s one: Santa Claus Rallies typically happen between Christmas Day and New Year’s Day; perhaps this draw-down of equity valuations is spring-loading a good ol’ fashioned Santa Claus Rally, after all. That said, all we might expect at the start of the new year would be more draw-downs until we get an even clearer picture on the Fed interest-rate/inflation front.
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