ClearWater Market Commentary as of December 16th, 2022

Here is the ClearWater Market Commentary as of December 16th, 2022:

In this issue:
– Performance of Major Indices
– Market Commentary
– Last Week’s Key Economic  Events and Upcoming Events

Performance of Principle Indexes: 

S&P/TSX Composite Index
5 Day	-2.53%
1 Month	-2.69%
YTD	-8.39%
1 Year	-6.25%

^{As of 2022/12/16 – Source: www.marketwatch.com}

Index Performances	Last 5 Days	YTD
WTI Crude (oil)	4.60%	-1.20%
Hang Seng Index	0.54%	-16.85%
MSCI EAFE	-0.90%	-16.00%
FTSE 100	-0.95%	-1.73%
Dow Jones Industrial	-1.70%	-9.40%
Russell 2000	-1.97%	-22.40%
S&P 500	-2.10%	-19.20%
Shanghai Composite	-2.27%	-14.46%
S&P/TSX Composite	-2.53%	–8.39%
Nasdaq	-2.70%	-31.60%
DAX	-2.74%	-12.91%
CAC 40	-2.86%	-10.20%

^{As of 2022/12/16- Source: www.marketwatch.com}

Last week’s and next week’s key economic events:

US economy (S&P 500 -2.10%):

• Intensified fears over rising interest rates pushed the S&P 500 Index lower for a second consecutive week and to levels last seen in early November. Nearly every sector within the index recorded sharp losses with the exception of energy shares, which were supported by a partial rebound in oil prices. 
• Roughly USD 4 trillion expiration in options contracts on Friday sparked additional volatility. They also observed that trading in exchange-traded funds (ETFs) reached near record levels at midweek, indicative of investors moving in and out of stocks as a whole in response to broader economic signals.
• Two highly anticipated announcements during the week appeared to send sentiment in opposite directions—much higher at the start of the week and sharply lower at its end. The first was the release of the consumer price index (CPI) before trading began on Tuesday. The data showed that headline inflation rose only 0.1% in November from October, bringing the year-over-year gain to 7.1%. That is still well above the Federal Reserve’s long-term 2% inflation target, but the lowest level since December 2021. Core (less food and energy) inflation rose 0.2%, a tick below consensus expectations and largely driven by housing costs, which are already showing signs of cooling.
• Many investors assumed that the good news on inflation would have notable impact on Fed policy, but the release of the December policy meeting statement on Wednesday afternoon, followed by Fed Chair Jerome Powell’s press conference, sent stocks sharply lower. While, as widely expected, the Fed slowed its pace of rate increases by announcing a 50-basis-point (0.50 percentage point) increase in the federal funds target rate—the four previous meetings each brought rate increases of 75 basis points (0.75 percentage point)—the official statement reiterated that ongoing rate increases are likely.
• Major stock indexes tumbled over 1% within seconds of the release, perhaps as investors flipped to the quarterly summary of individual policymakers’ economic projections, which showed that the median projection for the federal funds rate in 2023 rose to 5.1%, well above the 4.6% officials had anticipated in September. 
• Fed Chair Powell did little to calm fears at his press conference, stressing the need for further rate hikes and the inflationary dangers of a tight labor market, which has proved resilient despite the Fed’s aggressive rate hikes this year. Similar rate moves and commentary from European central banks on Thursday seemed to have further darkened investors’ moods.
• The other notable surprise of the week may have been Thursday’s data on retail sales, which dropped 0.6% in November, defying expectations for a small increase and indicating a disappointing post-Thanksgiving “Black Friday” and “Cyber Monday” sales season. Sales in the previous two months were also revised lower.

Canadian markets (S&P/TSX -2.53%):

• Investor hopes for a “Santa Claus rally” this December were dampened yet again Friday, as broad-based declines capped a week of losses on North American markets.
• The S&P/TSX composite index closed down 157.35 points at 19,443.28, for its second straight weekly loss. Canada’s largest stock index is down five per cent since the beginning of the month.
• Investors may have started the month with high hopes for a “Santa Claus rally,” a term used to describe what has been a historical tendency for the month of December to deliver positive returns for Canadian and U.S. stocks.
• But as recession fears mount globally, those hopes are quickly dwindling. The week started positively with the release of the latest U.S. consumer price index data, which showed the rate of inflation in that country is beginning to slow.
• The brief bump markets got from that news was quickly derailed by the U.S. Federal Reserve, which on Wednesday signaled that it is willing to keep interest rates high for most of next year to maintain its aggressive attack on prices.
• Oil prices also continued their slide on Friday, with the February crude contract down US$1.69 at US$74.46 per barrel.
• That took a bite out of Canadian oil and gas stocks, with the S&P/TSX capped energy index declining 2.72 per cent — making it the hardest-hit sector Friday.
• The January natural gas contract was down 37 cents at US$6.60 per mmBTU.
• The February gold contract was up US$12.40 at US$1,800.20 an ounce and the March copper contract was down one-and-a-half cents at US$3.76 a pound.
• The Canadian dollar traded for 73.06 cents US compared with 73.31 cents US on Thursday.

Performance 2022: S&P 500 Sectors   

Forward P/E Ratios: S&P 400/500/600 Sectors

European and Asian economies:

• Shares in Europe fell sharply after central banks indicated that interest rates would likely need to rise further and for longer than markets previously hoped. 
• The European Central Bank (ECB) raised its key interest rate by 0.5 percentage point to 2%. Although the increase was less than the three-quarter-point hike implemented at the two previous meetings, ECB President Christine Lagarde said rates “will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive” to bring inflation back down to the central bank’s 2% target. The ECB also said it plans to shrink the portfolio accumulated as part of its Asset Purchase Programme by an average of EUR 15 billion per month, starting next March and running through the end of the second quarter.
• The downturn in eurozone business activity continued for a sixth consecutive month in December, according to preliminary results from a survey of purchasing managers. 
• The Bank of England (BoE) hiked its key interest rate by 0.5 percentage point—the ninth consecutive increase—to a 14-year high of 3.5%. The Monetary Policy Committee, which voted 6–3 in favor of the move, said “further increases” may be required to quell inflation. The BoE also forecast that the economy would shrink 0.1% in the final quarter of the year, less than its November estimate, which had called for 0.3% contraction.
• UK inflation fell from a 41-year high to 10.7% in November as motor fuel prices weakened. Official data showed that the economy shrank 0.3% sequentially in the three months through October. The jobless rate rose to 3.7% in October from 3.6% in September. Average wages rose 6.1% in the three months through October but fell by 2.7% when adjusted for inflation.
• The Swiss National Bank raised its benchmark interest rate by 0.5 percentage point to 1.0%. “It cannot be ruled out that further increases will be necessary,” Chairman Thomas Jordan said. 
• Japan’s stock markets fell over the week. Risk appetite suffered as the U.S. Federal Reserve presented a more hawkish than anticipated monetary policy outlook and concerns grew that continued tightening by the major central banks could push the global economy into recession. Japan’s government finalized its tax revision package, while the latest PMI data highlighted the divergence between an expanding services sector and a shrinking manufacturing sector.
• Having recently announced that it would gradually double spending on defense to about 2% of gross domestic product, Prime Minister Fumio Kishida’s government has now agreed to raise taxes—including corporate and tobacco taxes—to fund the increased expenditure.
• The government will also make the terms of retirement accounts (NISAs, or Nippon Individual Savings Accounts) more attractive from January 2024. This will include making permanent certain tax exemptions that had previously been time-limited and increasing the maximum annual investment amount—as the government seeks to encourage individuals to shift from savings to investments.
• December PMI data showed that Japan’s services sector expanded while manufacturing contracted. Growing tourism volumes boosted demand for services, and firms saw their pricing power increase. This was against the backdrop of easing COVID concerns, which supported consumer confidence. 
• Chinese stocks fell as weaker-than-expected economic data dampened investor sentiment. Remarks from Vice Premier Liu He indicating that Beijing is considering new measures to support the real estate industry lifted property sector stocks.
• A trio of key economic indicators for November came in weaker than expected as pandemic-related disruptions weighed on activity. Industrial production rose by 2.2% in November from a year earlier, marking the softest growth since May, while retail sales declined by 5.9%. Fixed asset investment for the year through November also missed forecasts.
• Although China recently lifted some of its more onerous coronavirus restrictions, the country’s economic reopening is expected to be bumpy. Recent reports have noted that economic activity remains depressed as concerns about the virus’s spread have discouraged people from resuming their normal activities, while rising infections have left many businesses facing labor shortages.
• In other news, senior officials drafted the policy agenda for China’s economy in 2023 during the Central Economic Work Conference, an annual meeting that sets economic policy for the coming year. Officials reportedly set out guidelines aimed at boosting domestic consumption and investment to drive growth through 2035 as China continues to struggle with virus-related headwinds and weakening external demand. Sectors targeted for supportive measures include housing, tourism, electric vehicle manufacturing, health care, and education.

What to watch this week:

• BOJ Interest Rate Decision
• Housing Starts (Nov)
• U.S. GDP Growth Rate – Final Reading (Q3)
• Real Consumer Spending – Final Reading (Q3)
• Corporate Profits – Final Reading (Q3)
• CB Leading Economic Index (Nov)
• PCE Price Index (Nov)

• 

Sources: Bloomberg.com,Yardeni.com, Barron’s.com, Factset.com and Newyorkfed.org

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