U.S. stocks powered higher this week, notching their longest weekly winning streak in over six years as inflation continued to ease. The S&P 500 rose 0.8% on the week, closing just below its September record high, while the Nasdaq climbed 1.3% and also came within striking distance of prior peaks.
Inflation Data Stokes Optimism
The market gains came after a key measure of inflation, the personal consumption expenditures (PCE) price index, rose just 0.1% in November from the prior month versus expectations of a 0.2% increase. The annual rate slowed to 5.5% from 6.0%, moving closer to the Federal Reserve’s 2% target.
“It was an expectation-busting inflation report,” said Ryan Detrick, chief market strategist at Carson Group. “Anytime we continue to see inflation being tamed, that gets investors excited about what that means for Federal Reserve policy next year.”
The data supports the case for the Fed to slow its aggressive interest rate hikes, buoying equities. Central bank policymakers raised their benchmark rate by 50 basis points last week, downshifting after four consecutive 75 basis point increases. They also forecast rates peaking under 5% in 2023, below September projections.
Nears Record Territory
Buoyed by the inflation data, the S&P 500 closed Thursday at 4,740.47, putting the index less than 0.3% from its September 2 record closing peak. The Nasdaq finished at 11,082. The tech-heavy index stands just 2.3% away from its November all-time high.
“It certainly seems that momentum is continuing to build, especially when you consider how close the Nasdaq is to reclaiming its 2022 peak,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.
The market rally gained steam in October after September’s lows and has powered higher since, notching eight straight positive weeks. That marks the longest such streak for the S&P 500 since November 2021 and the best run for the index since 2009-2010 coming out of the global financial crisis.
Rate Cut Hopes Firm
Investors are increasingly betting that easing price pressures will allow the Fed to cut interest rates in the back half of 2023 to support economic growth. Futures prices imply a greater than 50% chance of a quarter point reduction by September and more than fully price in cuts before year-end.
“The market is feeling pretty confident that we’ll get rate cuts next year,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. “I think a lot of the good news is priced in at this point when you look at how much the market has rallied.”
Others caution that the central bank’s policy trajectory remains data dependent.
“There are still a number of important economic reports yet to be released before the Fed’s next policy decision in late January that could decidedly impact the market’s rate cut fever,” noted Robert Schein, chief investment officer at Blanke Schein Wealth Management.
Nike Plunges on Margin Warning
The market’s upward march came despite substantial losses for Nike stock. Shares of the athletic apparel and footwear maker plunged over 12% on Friday, contributing to a drop of 0.2% for the Dow Jones Industrial Average.
Nike delivered better-than-expected fiscal second quarter revenue but warned margins could remain under pressure over the coming quarters from elevated freight and logistics costs as well as a stronger dollar. It forecast gross margins declining up to 1.5 percentage points in the back half versus prior projections of little change.
| Stock | % Change | Contribution to DJIA |
|---|---|---|
| Nike | -12.81% | -89 points |
| Goldman Sachs | +1.11% | +5 points |
| Caterpillar | +0.96% | +4 points |
“Nike’s gross margins badly lagged expectations due to supply chain problems and foreign exchange headwinds,” noted Jesse Cohen, senior analyst at Investing.com. “It just shows that inflation continues to affect consumer companies.”
Offsetting the Nike decline, the 30-stock Dow received lifts from gains in shares of companies like Goldman Sachs, Caterpillar and Chevron.
Market Outlook
Even after the recent rally, stocks don’t appear overly expensive relative to historical valuations and bond yields, suggesting the secular bull run could continue.
“U.S. equity valuations look reasonable against the backdrop of low real yields and solid corporate health,” noted Solita Marcelli, chief investment officer, Americas, at UBS Global Wealth Management. “The case for equities also looks reasonably positive when examining absolute valuation.”
Major U.S. stock indexes have posted sizeable upside over the past 15 weeks as inflation cooled more quickly than anticipated, bolstering the case for a less aggressive Fed. Continued moderating price pressures and consumer strength could provide a runway for additional gains.
The Labor Department will release the November new home sales report on Monday. October data showed sales rising on lower prices and mortgage rates. The wider housing market remains a key area to watch heading into 2023 given its importance for the economy.
With the inflation report now digested, lingering uncertainty over the Fed’s rate hike path and future corporate earnings trends could inject some volatility into trading sessions. But analysts expressed optimism on the market finishing 2022 strong with seasonal tailwinds.
Santa Rally Could Continue
The historically strong year-end rally remains in play, which could lift stocks to new highs. Since 1969, the S&P 500 has averaged a gain of 1.3% during the seven-day period encompassing the last five trading days of December and first two days of January, according to the Stock Trader’s Almanac.
Many on Wall Street expect those seasonal trends to hold even after the recent rally, supporting another push higher into year-end.
“We would not bet against the Santa Claus rally continuing to play out,” noted Chris Larkin, managing director of trading and investment product at E*Trade Financial. “But with volatility surely on the radar through year-end, being nimble is key.”
Investors have plenty of reasons for cheer so far this holiday season between cooling inflation, ebbing recession fears, a less aggressive Fed and stock indexes on the verge of reclaiming prior peaks. The upbeat mood could translate to robust consumer holiday spending, providing a springboard for markets early next year.
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