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This week's raft of economic data told us one thing loud and clear: Any market rally is an opportunity to go short.
This Friday's job report is a perfect example. The strong November jobs report now keeps the Federal Reserve on track to raise interest rates by a half percentage point at its meeting in two weeks.
Fed officials have continually warned they're likely to lift rates and hold them at levels high enough to slow economic activity and hiring to bring down inflation. This employment report showed continued strong hiring and wage growth, both major concerns for the Fed.
Employers added 263,000 jobs in November and revised wage data points to an acceleration in pay gains in recent months. For the three months through November, average hourly earnings rose at a 5.8% annualized rate according to the United States Department of Labor.
There's little hope of a long-awaited "Fed pivot" coming anytime soon.
Earlier in the week, we learned the central bank's preferred inflation gauge, the personal-consumption-expenditures (PCE) index, rose 6% in October from a year ago. Even looking at core PCE, which excludes volatile energy and food, the index still rose 5%, far above the Fed's 2% target.
The market is still pricing in a magical soft landing or mild recession with inflation falling back to target. The odds of that occurring seem low, and yet markets are pricing in a fairly high chance of precisely that outcome.
Jerome Powell has not signaled he'll let up; he still points to how much needs to be done in order to bring down inflation. He even pointed to what is called a wage-price spiral, in which paychecks and prices move in lockstep, creating a very serious problem. Target rates which are still at 5% are above and we won't see that number until 2023.
Earnings Will Drag the Market Down
While the S&P 500 has seen a near-15% move up in the last month and a half, unimpressive earnings and guidance could send stocks lower again as interest rates continue to rise into 2023. According to data from Factset, S&P 500 quarterly earnings estimates change from a year earlier are now negative at -2.1%. That's something we haven't seen since the start of the pandemic.
The fundamentals just aren't there and with earnings estimates still coming down, stocks look expensive on a forward-looking basis.
With indexes sitting right around their 200-day moving average any breakdown could send stocks significantly lower.
Watch for momentum to turn, and if it's down, it will be time to get short.
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