- Stocks suffered a fourth straight week of losses and ended their two-month winning streak. The S&P 500 slipped -0.1% and the tech-heavy Nasdaq Composite fell -0.3%, but the small cap Russell 2000 treaded water, essentially flat for the week (+0.02%). Developed international stocks were also flat (+0.02%), and emerging market stocks rose +0.2%.
- Treasury yields rose for the second week in a row, with the 10-year yield up 13 bps to 3.87% and the 2-year yield up 10 bps to 4.43%. The Bloomberg U.S. Aggregate Bond Index fell -0.7% for the week and the Bloomberg Global Aggregate Bond Index ex U.S. was down -0.1%.
- Economic data for the holiday-shortened week was sparse. The pace of home price growth decelerated and pending home sales plunged as higher mortgage rates hit the housing market. Weekly continuing unemployment claims rose to their highest level since February.
U.S. stocks and bonds close out 2022 with weekly losses
U.S. stocks closed out the year’s final week with the choppy trading that characterized most of 2022. At this point, it appears that the fabled Santa Claus Rally (SCR) may not materialize this season. Yale Hirsch first documented the SCR pattern in his Stock Trader’s Almanac in 1972, observing that from 1950 through 1971, the S&P 500 averaged +1.5% over the last five trading days of the year and the first two trading sessions of the new year. The pattern has largely held, averaging +1.3% from 1950 through 2021, but so far in 2022 the SCR is down -0.1%. So the S&P 500 will need to move up over the first two days of the new year to get into positive territory. The lack of a Santa Claus Rally can be a preliminary indicator of continued challenges for the market.
It was a disappointing week, and year, in the Treasury market. The 2-yr note yield rose +10 basis points to 4.43% and the 10-yr note yield rose +13 basis points to 3.87%. Those yields are starkly higher than the 0.73% and 1.51%, that the 2-year and 10-year yields ended 2021 at. The advance in yields posed a headwind for equities, particularly for growth stocks, for the week, and most of 2022. The Russell 1000 Growth Index fell -0.3% this week, making U.S. Large Growth the worst-performing equity style for the week, and at -29.1% for 2022, the worst for the year as well. Of course, with yields up, bonds were down, with the Bloomberg U.S. Aggregate Bond Index falling -0.7% for the week – and finishing 2022 with their worst annual decline in history, a -13.0% loss. It was the first year since 1994 that both stocks and bonds finished in the red.
The economic calendar was light on major releases in the holiday-shortened week. Reports included the November Pending Home Sales, which declined -4.0% for the month and plunged -38.6% for the year. Home prices were up nearly +10% from the prior October, representing an annual deceleration as higher mortgage rates continue reducing demand. Continuing jobless claims hit their highest level since February, with 1.71 million claims filed for the week ending December 17. The calendar gets a lot busier next week, with major releases that include the December Manufacturing and Service PMIs, the release of the December FOMC meeting minutes, and the highly anticipated December Employment Report.
Chart of the Week
Most holiday shoppers are well aware that spreading cheer costs more this year than it did in 2021. Perhaps the story for the U.S. economy in 2022 was record-high inflation, which resulted in rocky markets for both equity and fixed-income assets. Various inflation gauges were the subject of the Chart of the Week multiple times throughout the year, and we will conclude with one final look at inflation – PNC’s Christmas Price Index. The PNC Christmas Price Index closely mirrors the Consumer Price Index (CPI) and has risen +10.5% from 2021 and +16.8% from pre-pandemic levels. PNC conducts an analysis to calculate the current cost for one set of each of the gifts of “true love” in the song “The Twelve Days of Christmas.” Higher commodity prices are the primary driver of higher inflation this year, with higher feed costs pushing prices for turtle doves and French hens up +33.3% and +25% year-over-year (y/y), respectively. Similarly, higher precious metal prices boosted the cost of a gold ring by +40% y/y, the largest increase in the index. Despite the Fed’s efforts to tame inflationary pressures, average hourly earnings increased +5.1% y/y in November and remain strong from a tight labor market. As a result, ladies dancing, pipers piping and drummers drumming all received a pay raise, which pushed holiday entertainment costs up by about +9.8%. Fortunately, some relief from the inflation may come in the new year as most economists forecast a steady inflation deceleration in 2023.
Prices of gifts from the song “The Twelve Days of Christmas”
PNC Christmas Price Index, % price change vs. 2021 levels
Source: BLS, PNC, J.P. Morgan Asset Management.
- The S&P CoreLogic Case-Shiller Home Price Index, which measures average home prices in major metropolitan areas across the nation, showed a seasonally adjusted decline of -0.5% in October from September, the fourth straight month-over-month decline. Year-over-year (y/y), October was up +9.24%, below the prior month’s upwardly revised +10.72% y/y increase.
- House prices were flat nationwide in October, with the Federal Housing Finance Agency (FHFA) House Price Index (HPI) experiencing a 0.0% change from the previous month and up +9.8% from October 2021 to October 2022. The previously reported +0.1% price increase in September 2022 remained unrevised. “U.S. house prices have seen two consecutive months of near-zero appreciation,” said Nataliya Polkovnichenko, Ph.D., Supervisory Economist, in FHFA’s Division of Research and Statistics. “Higher mortgage rates continued to put downward pressure on demand, weakening house price growth. The U.S. house price index growth decelerated as it posted the first 12-month growth rate below 10 percent after 24 consecutive months of double-digit appreciation rates.”
- November Pending Home Sales fell -4.0% for the month, worse than expectations for a -1.0% decrease but better than October’s negatively revised -4.7% drop. Sales plunged -38.6% year-over-year, following October’s unadjusted -36.7% tumble. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, as properties typically go under contract a month or two before the contract is closed.
- The December Dallas Fed Manufacturing Index unexpectedly fell further into contraction territory (reading below zero), dropping to -18.8 from -14.4 in November, missing expectations for an increase to -13.5. The decline came despite an expansion in production growth, employment, new orders, and the growth rate of orders. However, finished good inventories fell into contraction territory, as did capital expenditures. Prices received for finished good also declined but remained in expansion territory.
- The December Richmond Fed Manufacturing Activity Index unexpectedly climbed into expansion territory (a reading above zero), rising to 1 from -9 in November, above expectations for a decline to -10. Shipments and employment moved from contraction to expansion, and growth in wages accelerated.
- The December Chicago PMI improved more than expected but remained in contraction territory (a reading below 50), increasing to 44.9 from 37.2 in November, beating expectations for a slight rise to 40.0.
- Weekly Initial Jobless Claims rose by +9,000 to 225,000 for the week ended December 24, in line with expectations and above the prior week’s unrevised 216,000. Continuing Claims for the week ended December 17 rose by +41,000 to 1,710,000, above expectations of 1,690,000.
The Week Ahead
The first trading week of the year will see financial markets closed on Monday for the New Year’s Day holiday before economic releases start picking back up again. The remaining week’s schedule is heavy on jobs data with JOLTS job openings, the ADP employment report, weekly jobless claims and the highly-anticipated release of the December jobs report on Friday. A stronger-than-anticipated jobs report could lead to even more hawkishness from the Federal Reserve. S&P Global and ISM will also be releasing their respective Purchasing Managers Indices (PMIs) for the manufacturing and services sectors of the economy. Outside economic data, companies across various sectors could pre-announce earnings or issue guidance updates and anything below expectations could challenge markets.
Did You Know?
UP BUT DOWN – The U.S. Dollar Index is up for the year, just not as much as it used to be. The dollar’s biggest year-to-date percent gain was as high as +19% on September 27. But the dollar is ending the year on the defensive, having given back about 9% of its gains since the September peak. Even with the recent pullback, 2022 will be the best year for the U.S. Dollar Index since 2015 (source: Bloomberg, The Wall Street Journal).
LEARNING LOSS = EARNINGS LOSS – Learning loss could shave $70,000 off the lifetime earnings of children who were in school during the pandemic. According to a new study by a Stanford economist based on sharp declines in eighth-graders 2019-2022 national math tests scores, if the learning losses aren’t recovered, K-12 students on average will become less educated, lower-skilled and less productive adults and earn 5.6% less over their lifetimes than those educated just before the pandemic (source: The Wall Street Journal).
LUV IS NOT IN THE AIR – In a follow-up from last week’s note (“TRAVEL ADVISORY”), Southwest Airlines (ticker symbol LUV) had to call a “state of operational emergency” after the airline canceled more than 70% of its scheduled flights over the Christmas holiday season, more than 12,000 flights since Friday, December 23rd, which was far more than other major carriers. The travel chaos resulted in the U.S. Department of Transportation indicating they will be closely monitoring the company. The company finally returned to normal flight operations on Friday, December 30 (source: The Wall Street Journal).
This Week in History
SALAD OIL SCANDAL – On December 30, 1963, American Express Company subsidiary American Express Warehousing declared bankruptcy after inspectors exposed a fraud scheme staged by commodities trader and con man Anthony “Tino” De Angelis. De Angelis and his company Allied Crude Vegetable Oil company obtained a contract with the federal program Food for Peace, which oversaw selling excess U.S. food stocks to poor countries. De Angelis borrowed money against his salad oil inventory, which was extremely exaggerated. Allied tricked inspectors in multiple ways, including filling cargo ships mostly with seawater and floating a few feet of salad oil on top and transferring the same oil stock from tank to tank to tank. De Angelis posted 1.8 billion pounds of soybean oil as collateral for $180 million in loans from American Express, Bank of America Corp, and other international banks. In reality, Allied only had about 110 million pounds of oil (source: Benzinga).
Asset Class Performance
The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.