Stocks drifted nearly unchanged over the Thanksgiving holiday in the U.S., but remain on pace to notch their best monthly performance since November 2020. The lackluster trading sessions showing stocks drifting over Thanksgiving break extended from Asia into Europe as major indices hovered around the flatline, though the overarching bullishness shows little sign of fading.
“We’ve seen lighter volumes contribute to stocks treading water over this period,” said Michelle Smith, a senior analyst at ABZ Capital. “But the appetite to buy dips could quickly resume next week as key tailwinds around peaking inflation and rates still seem valid post-break.”
Markets have been buoyed by several key narratives reversal fears over the longevity of the bull market and economic cycles after a turbulent year:
Fed Rate Hike Peak Appears Reached
The S&P 500 has powered higher by over 7% in November alone, its best month since July. Gains have come on the heels of investor conviction that the aggressive Federal Reserve rate hike regime may have crested.
After taking its benchmark Fed Funds rate from 0-4.5% between March and November, most economists expect a downshift to 50 basis point hikes in December and February before pausing. This follows October’s inflation reading falling below 8% annually for the first time in 2022.
“Seeing consumer price growth cool played a vital role shifting rate hike and recession views,” explained Brian Lloyd, senior economist at Merit Bank. “If we get further demand destruction taking price growth closer to the Fed’s long-term 2% target, markets are betting they slow tightening by mid-2023.”
Perceived “peak rate” timing collided with still-resilient economic signals and corporate earnings to ease market fears. As of November 23rd, 77% of S&P 500 companies beat Q3 earnings expectations. Apple, Microsoft, Meta, Alphabet all showed stable performance.
“Between steadier inflation and corporate health, conviction that overtightening crashing growth seems less likely for now,” added Smith. “Thus stocks rebounded sharply off mid-October lows.”
Key Market Tailwinds Supporting Rally
Cooling Inflation Data
- Headline CPI slipped from 9.1% to 7.7% since June peak
- Weekly earnings, shelter, goods costs all declining
- Provides Fed leeway to be less aggressive tightening
Employment and Spending Holding Up
- 263,000 jobs added in November beats expectations
- Manufacturing still expanding with 53 PMI reading
- October retail sales better than forecast at 1.3%
China Reopening Positive
- Officials signal COVID-zero policy changes eventual
- Expected to help global growth outlook in 2023
- Tempered by protests and case upticks recently
Corporate Earnings Beats
- Over 75% top line beats across S&P 500 for Q3
- Mega-cap tech like Microsoft and Alphabet resilient
- Mirrors economy outperforming expectations
Rates Seen Topping Out
- 10-year Treasury yields off 2-month highs near 5%
- Fed Fund futures pricing in rate cuts back half 2023
- Takes pressure off rate-sensitive assets like housing
Technical Levels Still In Play
The S&P 500 closed Wednesday at 4,027 – up 18% off its October low, but still nursing a 10% loss year-to-date following its 20% plunge in 2022’s first half that constituted a bear market.
Upside resistance remains around the psychological 4,100 level struck Monday – which would confirm the index’s technical breakout from the aforementioned bear market trading range in place for most of the year if reclaimed.
“Exceeding 4,100 decisively, especially on a monthly close, would signal smooth sailing to the 200-day moving average near 4,300 with limited overhead supply,” said Mark Riley of Transition Capital Partners.
Risks Remain
However, with still-high inflation paired global uncertainty around oil, pandemics, geopolitics and military conflict, many continue urging caution around overly bullish growth conviction. A recent Bank of America fund manager survey showed investors cutting equities exposure to a two-year low.
If inflation fails to show consistent moderation or the Federal Reserve projects prolonged hiking, markets could reprice rate cut expectations and rediscount peak tightening views. That poses upside risk to interest rates which could destabilize equity markets.
A professor of finance at Wharton Business School told The Wall Street Journal: “There’s still fragility here that could bring another leg lower if certain narratives shift on inflation sticking higher for longer than appreciated currently.”
Europe Joining Rally But Risks Still Linger
European shares also gained firmly in November after a volatile year marked by energy crises, war conflict and ballooning inflation. The pan-European STOXX Europe 600 index rose 8% on the month led by cyclical sectors. An easing euro took pressure off exporters as well.
However, the European Central Bank has warned more jumbo hikes are likely even as it’s already lifted its deposit rate by 200 basis points to 1.5% in 2022 – a record pace signalling quantitative tightening remains on the menu.
This keeps recession risks elevated next year for the region due to lingering pandemic impacts plus higher costs of capital that could restrict investment and squeeze consumers via higher loan rates.
Conclusion and Outlook
With the focus keyphrase “stocks drift over Thanksgiving break” suggesting, equities paused but held onto their November gains during the low-volume holiday sessions. The risk-on shift was fueled overwhelmingly by peak inflation and rate hike narratives seen improving next year’s macro growth outlook.
China reopening optimism and resilient economic indicators out of the U.S. also complemented the bullish catalysts to help stocks bounce back hard since mid-October lows despite lingering risks.
All eyes now turn to December’s consumer price index read, Fed meeting, jobs preview and pace of demand slowdown for further evidence validating peak inflation. More concrete signs of prolonged moderation would reinforce convictions around an eventual dovish policy pivot to further spur rallies.
Until clear consistency emerges around price declines and leading indicators stabilize globally, volatility may stick around. But incremental progress on key fronts keeps investors confident relative to trickier early 2023 outlooks, posing upside potential as 2022 wraps up.
