Watch the CPK Market Action Report: Decmber 2022
Stocks continued their tear higher on Wednesday posting fresh multi-month highs after receiving dovish commentary from Federal Reserve Chair, Jerome Powell. Is it too late to start putting your cash to work or is this just a temporary year end relief rally that will fizzle out over the next several weeks?
Watch the Market Action Report now:
Market Action Report
December 2022
INTRO TAG
Stocks continued their tear higher on Wednesday posting fresh multi-month highs after receiving dovish commentary from Federal Reserve Chair, Jerome Powell. Is it too late to start putting your cash to work or is this just a temporary year end relief rally that will fizzle out over the next several weeks?
That action starts, NOW!
INDEX PERFORMANCE RECAP
Stocks continued their march higher in November with the Dow Jones Industrial notching a 5.26% gain and 4.56% for the S&P 500. The Nasdaq Composite continued its struggle posting a modest gain of 2.81%.
EQUITY UPDATE
Stocks rallied again in November providing much needed relief to many investors. While this is a welcomed rebound, I am still of the belief that stocks will more likely revisit the late September lows and possibly even lower before breaking out to new highs. If the jobs report is soft and the Fed dots on Dec. 13 aren’t too hawkish, stocks can rally into year-end on seasonals and chasing. But the fundamentals remain challenged for this market, and we really aren’t any closer to a Fed pivot than we were prior to Powell’s comments, and I would not chase this rally unless you’re very nimble and shorter-term focused.
BOND UPDATE
Bond yields retraced a bit this month adding to the rally in equities. At month end, the 5yr was yielding 3.83% while the 10yr closed at 3.70% and the 30yr at 3.82%.
During the month, the 10’s 2’s spread has widened to 70 basis points. This is an extremely low reading that continues to warn of a looming material economic slowdown. It is clear, the bond market thinks the Fed rate hikes will crush growth and any hopes of a soft landing. This is precisely why I will continue to report this reality so nobody is caught by surprise.
COMMODITY UPDATE
Concerns over rumors of a possible OPEC+ cut in excess of the original 2m barrels a day in addition to a potential lifting of the zero Covid policies in China helped WTI reverse course at month end. However, it wasn’t enough to offset losses from earlier in the month closing out at $80.52. So far, WTI has held on to its key support level of $76/barrel with a resistance level of $93. Any confirmation of a soft landing from the Fed’s action could cause WTI to retest recent highs in the 90’s. However, any renewed worries of a deep and lengthy recession would most likely push futures to new 52-week lows.
Copper had a nice rally to start the month before ultimately retracing some of its gains to close out at $3.78/oz. The uncertainty surrounding the Covid situation in China and lack of clarity on broader global economic trends are keeping copper prices in check right now, and unless there is some very good news such as a clear signal of a Fed pivot coming sooner than later, then recession fears are likely to drag copper and other industrial metals back lower in the weeks and months ahead.
As I mentioned last month, the path of least resistance for Gold would be lower until we hear any indications of a Fed “pause and pivot”. Well, that is exactly how investors interpreted comments from Fed Powell’s speech. As such, Gold had a really nice rally for the month gaining just over 7.5% to $1,769.40/oz. However, any future news that speaks to the contrary will definitely allow the yellow brick to roll over and test the lows for the year.
CURRENCY UPDATE
The U.S. dollar continued its decline from last month closing down at $106.03. Last month, I stated that a weaking dollar should serve as a strong support to equities. That is exactly what has happened.
The Dollar Index spent months above 110 as markets saw no end in sight to the Fed tightening. Now that inflation has started to decline and the Fed is reducing the intensity of rate hikes, the dollar has declined on that shifting outlook. For the dollar to drop below 105 and the currency headwind on earnings to materially ease, we must get close to that Fed pivot. Unfortunately, there remain few signs that’s going to happen anytime soon.
ECONOMIC UPDATE
Late month CPI reports out of Europe and our own Case-Shiller Home Price Index showed more evidence of disinflation. Normally, the European numbers would not be something on our radar. However, inflation has been a global phenomenon. So, if evidence builds that it has peaked globally, that will make central banks more confident that, collectively, their rate hike regimen is working.
Bottom line, the fastest way to a Fed pivot is via quick and widespread disinflation, not just in the U.S., but globally. These statistics will only further reinforce the idea that inflation has peaked, and while it’s still much, much too high for a pivot anytime soon, the more evidence of disinflation the sooner the pivot comes, and that’s why the German and Spanish CPIs and Case-Shiller reports were positives.
THE WRAP
I get it that the market has experienced a nice rebound over the last two months. However, as I stated earlier, I would not be getting all giddy about it and overly excited that it is going to continue.
While some interpreted the Fed as sounding a bit less hawkish, they have not really made any major changes to their plan of raising interest rates to their ultimate goal. In fact, Powell indicated rates may need to stay higher for longer than expected. This will eventually require a compression on earnings of which we really haven’t seen, yet and that will have a negative impact on equities. So, I continue to remain cautious in our approach to finding growth in this market and would encourage anyone who is fully invested right now to consider increasing their cash position to protect against potential declines, that would retest our October lows.
Consumer confidence for November has dropped to a four-month low. Why? Do a quick Google search on American Fund Performance and review the year-to-date performance for both growth and fixed income funds. Then do the same for Vanguard Funds. You will find the majority of the growth funds are down 20-30+ percent. Shockingly, even some of the fixed income funds are down the same. If you are a client of mine, this may come as a surprise to you when you consider that our growth models are only down single digits as I write this.
If you are viewing this and you are not a client just yet, you are most likely feeling quite crushed and hoping that if you just hold out long enough, things will come back. The reality is lost time is lost money. No matter how quickly you are made whole with your investments, you will never catch up to those who rebound quicker than you. You will always outperform with cash as there are no losses to recover from. That’s a fact!
CPK FOCUS
For the month of December, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature. That’s convenient, with Cash remaining in the top-ranked position this month. Once again, I am proud to say, our approach has kept our performance ahead of all the major index’s year to date.
Our broad focus is now on Cash and Domestic Equities with Commodities coming in a close 3rd.
As you know, WE already hold a 40% Cash position. So, there are no major change we need to make to accommodate the current dominance of Cash.
In Domestic Equities, our focus is on Mid Cap Value, Mid Cap Blend and Small Cap Value with an emphasis on Energy, Financials, Consumer Non-Cyclical, Basic Materials & Industrial sectors.
For Commodities, our focus is on Precious Metals and Agriculture.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the December 2022 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!