Market Insights

Stocks fell again last week as the Federal Reserve’s tough stance on inflation made investors worry about earnings and a potential recession in 2023.

The S&P 500 slid 2.1 percent between Friday, December 9, and Friday, December 16. The Nasdaq-100 fell even more, down 2.8 percent, as Tesla (TSLA) suffered its biggest weekly drop since since March 2020.

“The labor market continues to be out of balance, with demand substantially exceeding the supply of available workers,” Federal Reserve Chairman Jerome Powell said after raising interest rates by 50 basis points. While it was a smaller increase than the previous four meetings, the central bank made three big changes to its projections.

First, next year’s gross domestic product was downgraded from maximum growth of 1.5 percent to 1 percent. Second, unemployment is expected to range from 4.3 percent to 4.8 percent, compared with 4 percent to 4.6 percent previously. They also raised the projected peak in interest rates by 50 percent points.

That cast a pall of negativity across markets because it delays the end of the hiking cycle. It also implies policymakers want to see more pain on economic growth and jobs before they pause.

Earnings Recession?

That kind of economic weakness could worsen an already-crumbling profit outlook. Analysts now predict fourth-quarter earnings will shrink by 2.8 percent, according to FactSet. It would be the first decline since the third quarter of 2020. Full-year profits are expected to climb 5.1 percent, down sharply from the 9.1 percent forecast in June.

Other data last week suggested a contraction has already begun. Industrial reports from the New York and Philadelphia Fed branches showed new orders tumbling. November retail sales also missed estimates by a wide margin as car buying slowed. Other big-ticket items like furniture, building materials and electronics also shrank.

There was also positive news on inflation as the consumer price index rose just 0.1 percent. That briefly lifted stocks before the Fed’s tough message.

Tesla Skids Lower

Consumer discretionaries were worst-performing sector last week, according to TradeStation data. Tesla (TSLA) led the selling as CEO Elon Musk sold about $3.6 billion more stock and investors worry about Musk’s involvement in Twitter. Goldman Sachs also cut its delivery forecast, seeing weaker vehicle demand.

Another automaker, Ford Motor (F), also fell sharply because of electric-vehicle cost overruns.

Speaking of costs, Charter Communications (CHTR) had the biggest drop in the S&P 500 after management announced plans to spend more on network expansion.

Netflix (NFLX) was another big decliner last week after Digiday reported the company has refunded advertisers because of disappointing viewership. That may raise questions about the company’s new commercial-based business model.

Moderna (MRNA) was the top performer in the S&P 500 amid positive Phase 2 data for a potential cancer vaccine.

Energy stocks also rebounded from a sharp drop the previous week.

Charting the Market

The S&P 500 made a three-month high above 4100 last Tuesday, then closed at its lowest level in over a month. That kind of outside week is a potentially bearish reversal pattern.

The index also closed below 3910, which has been support and resistance since the summer.

Some contrary indicators could also be swinging away from the bulls’ favor. Cboe’s volatility index (VIX) broke its downtrend, making a higher high and higher low for the second straight week. The National Association of Active Investment Managers (NAAIM) also reported the highest exposure to stocks since mid-August, shortly before the market peaked.

The Week Ahead

The market now begins its last full week of the year. Most of the economic data focuses on housing.

NAHB’s homebuilder sentiment index is the main report scheduled for today.

Housing starts and building permits are tomorrow. Tuesday is also the main session for earnings, with General Mills (GIS) slated for the premarket and Nike (NKE) and FedEx (FDX) after the close.

Wednesday’s agenda includes consumer confidence, existing home sales and crude-oil inventories.

Initial jobless claims and the final reading on third-quarter gross domestic product are on Thursday.

Friday brings the personal consumption expenditures (PCE) inflation report. Durable-goods orders, personal income and personal spending are also due.