Starting Over: Stock Futures Start Higher, But This Week May Be All About Friday's Jobs Report

(Tuesday Market Open) The first trading day of 2023 probably didn’t come quickly enough for many investors ready to stick a fork in gloomy, depressing 2022. Major indexes ticked higher Tuesday as Wall Street braced for critical data.

There’s not a great deal of direction as the new year starts, but brace yourself and don’t be complacent as trading continues this week. Things could happen fast as data, news, and earnings start to roll in.

Last week closed out the old year with the S&P 500 index® (SPX) down 19% since the end of 2021 and the Nasdaq Composite® ($COMP) down 33%.

It’s very rare for the SPX to have two losing years in a row. The last time the SPX fell in back-to-back years was an ugly three-peat during the dot-com collapse/September 11 attacks period of 2000-2002. This doesn’t mean we couldn’t see stocks fall again in 2023, because past performance doesn’t indicate the future. Still, most analysts do expect at least light gains in the market this year, for what it’s worth.

Also, the Q4 of 2022 broke three-quarter losing streaks for the SPX and the Dow Jones Industrial Average® ($DJI). The $COMP fell for the fourth-straight quarter, however.

Morning Rush

• The 10-year Treasury yield (TNX) is down sharply to 3.74%.
• The U.S. Dollar Index ($DXY) rose 1% to 104.69.
• Cboe Volatility Index® (VIX) futures flashed a warning, up sharply to 23.06.
• WTI Crude Oil (/CL) fell about 1% to $79.16.

One unnerving thing to keep on your radar is the 10-year Treasury yield. It reached nearly 3.9% on Friday, the highest level in more than a month and up a dramatic 50 basis points from the December low. Yields are also up in Europe over the last few weeks.

Rising yields aren’t exactly a roadmap for stock market gains and could reflect traders factoring in that central banks plan to keep borrowing costs higher for longer. That’s something the Federal Open Market Committee (FOMC) made clear back in December, and the European Central Bank (ECB) said likewise, noting it will need to raise rates “significantly” further to tame inflation.

Here’s something else worth watching. The Cboe Volatility Index® (VIX) jumped above 23 this morning even as stock futures rose. That tells you there’s a discrepancy. One or the other probably has to go down.

Potential Market Movers

The data calendar is light today but gets busier as the week continues. Tomorrow’s ISM Manufacturing report could be a market mover, and it all builds up to Friday’s December Nonfarm Payrolls release. Early consensus is for jobs growth of 210,000, according to Briefing.com consensus, down from 263,000 in November. More on expectations for the report in tomorrow’s column.

Earnings season unofficially begins a week from Friday when four of the biggest U.S. banks are expected to report. This week brings a taste of things to come with some results in the consumer space. Walgreens Boots Alliance WBA and Conagra CAG are expected to report before the bell Thursday. We’ll preview WBA, a component of the Dow Jones Industrial Average® ($DJI), in more detail tomorrow.

One possible item potentially coming to the market’s aid this week is the likely end of tax-loss harvesting, one factor analysts believe weighed on stocks in the final weeks of 2022. The January Effect could be another supportive factor.

On the other hand, with holidays over, be on the lookout for a possible uptick in corporate layoff announcements over the next few weeks.

Thinking Cap

While Q4 earnings season looms next week with analysts expecting a quarterly earnings decline, there are reasons to be positive as the new month starts.

In no particular order, here they are:

• Investors got a few more hints late last month that inflation is going in the right direction.
• The Fed has hiked rates so much it may have fewer and smaller increases ahead.
• Many high-quality stocks are now at levels that look relatively cheap as they’ve been dragged down with others that arguably deserved to lose their luster.

The Fed’s December 50-basis-point rate hike brought the target federal funds range to 16-year highs between 4.25% and 4.5%, not too far from the Fed’s current projected terminal, or peak, rate, of between 5% and 5.25%. There’s no guarantee the Fed won’t raise its terminal projection again at some point, but for now, anyway, it appears the rate hike cycle may be at least past the “end of the beginning,” in the words of Winston Churchill. Futures trading points to a possible 25-basis point hike at the FOMC’s January 31-February 1 meeting.

Reviewing the Market Minutes

If Friday’s low-volume, choppy trading session proved one thing as the old year closed, it was the resilience of stocks near recent lows. Apparently, there’s bargain-hunting interest when the SPX scrapes around down near 3,800. It hasn’t had two days of closes below that since early November, and Friday marked yet another day when a midday plunge found a net right at that round number.

The SPX bottomed at 3,800 early Friday afternoon but sellers couldn’t get it lower. Instead, the SPX rallied sharply all the way up to nearly 3,840 by the end of the day. Meaningful? Not necessarily. Recent rallies haven’t found much buying interest, and the SPX has had a lot of trouble getting and staying above 3,850 lately (see more below).

Still, it was nice to see that rally in the final hour of 2022 led by some of the more beaten down sectors like tech and communication services. It’s also nice to say good riddance to the old year and all of its misery for investors.

Here’s how the major indexes performed Friday:

• The $DJI fell 73 points, or 0.22%, to 33,147.
• The $COMP lost 0.11% to 10,466.
• The Russell 2000® (RUT) dropped 0.28% to 1,761.
• The SPX fell 9.78, or 0.25%, to 3,839, down 19.4% for the year and off just over 20% from its all-time high posted the first week of 2022.

Talking Technicals: Some SPX numbers to know:

• 3,819: This is a key Fibonacci retracement level from the March 2020 through January 2022 rally and has been a stalwart area of technical support over the last few weeks.
• 3,850: Two recent attempts to close above this level, most recently last Thursday when the SPX missed a close here by less than one point, have failed. These failures are bearish, signaling lack of enthusiasm about buying on rallies. A close between 3,850 and 3,900, if it happens, could signal more positive times ahead, but for how long is unclear. The SPX traded in a range between 3,900 and 4,100 for several weeks in late November and early December, but that went into the rear-view mirror after the mid-December FOMC meeting.
• 3,902: This is the 100-day moving average (MA) for the SPX, and it lines up almost perfectly with the big round number of 3,900 that marks the lower end of that earlier range.

CHART OF THE DAY: RANGEBOUND: After trading in a range between 3,900 and 4,100 in late November and early December, the SPX (candlesticks) has fallen back into a new recent range between 3,800 and 3,900. The 3,900 mark is an important technical one because it lines up very closely with the 100-day moving average (blue line). At the same time, 3,800 (red line) has been a supportive spot on the charts, with recent drops below that level quickly bouncing back as likely bargain-hunters swept in. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Debt Burden: It’s a new year, but like death and taxes, the federal debt is a newsmaker you can always count on and 2023 is no different. Interest payments on what the government owes are expected to grow more than 200% between 2022 and 2032, according to the Congressional Budget Office (CBO). Should investors be concerned about a possible impact on economic growth? Perhaps. Over the past 70 years, high (and rising) government debt has generally been accompanied by weaker economic activity, Charles Schwab Chief Investment Strategist Liz Ann Sonders wrote in a recent research article. Why? “One argument holds that a high and rising burden of debt crimps economic growth due to the ‘crowding-out’ effect (that is, servicing the debt crowds out more productive spending and/or investments),” Sonders explains. “A competing argument is that economic growth generally has been slowing over the past several decades, which has led to increased government spending to try to boost growth, thereby increasing the deficit and, in turn, debt levels.” Sonders adds that more debt is unlikely to generate greater economic growth, other than perhaps for a short span of time—eventually weighing on economic growth.

Home Truths: If you joined us in taking some time off last week, you might have missed the October Case-Shiller National Home Price Index, which was down 0.3% down for the fourth consecutive and off 2.4% since June. Fortune points out that this four-month decline represents the second-biggest home-price correction (after the post-2007 housing bust) of the post-World War II era. Moody’s Analytics chief economist Mark Zandi told the publication it will take until “at least 2024 before home prices bottom out.” Meanwhile, Freddie Mac reported that 30-year mortgage rates averaged 6.42% in the week ending December 29, its first upward move after six consecutive weekly declines. 

Get Ready for ISM Manufacturing: Another thing you might have missed last week was our January outlook report, which gives you a view into this coming month’s economic data and earnings. You’ll also find other worthwhile data there to work into your 2023 market thinking, so we hope you’ll find time to take a look.

Now to the calendar below featuring tomorrow’s important December ISM Manufacturing report. This is often a market-moving number, and the headline figure has been gradually falling for months. In November, the headline dropped below 50% for the first time after 29 months in a row of steady expansion (indicated by levels of 50% or higher). That 49% November reading was accompanied by softness in a range of the report’s data, including new orders, employment, order backlog and prices. Its Prices Index is one number to look for tomorrow, as it dropped to 43% in November from 46.6% in October, hitting its lowest level since May 2020. More of the same would be a positive inflation indicator many bulls would likely welcome. Consensus is for a slight upward move to 49.5%.

Notable Calendar Items

Jan. 4: December ISM Manufacturing Index and November JOLTS job openings

Jan. 5: Initial weekly Jobless Claims and expected earnings from Walgreens Boots Alliance (WBA), Bed, Bath & Beyond (BBBY), and Conagra (CAG)

Jan. 6: December Nonfarm Payrolls, November Factory Orders, December ISM Non-Manufacturing Index

Jan. 9: November Consumer Credit

Jan. 10: November Wholesale Inventories and expected earnings from Albertson’s (ACI)

Jan. 11: Expected earnings from KB Home (KBH)

Jan. 12: December Consumer Price Index (CPI) and expected earnings from Delta (DAL) and Taiwan Semiconductor (TSM)

Jan. 13: January University of Michigan Consumer Sentiment and expected earnings from JP Morgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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