Dow and S&P 500 Inch Closer to Record Highs
The major U.S. stock indexes clinched their 8th consecutive weekly gain, their longest such streak since 2017, as inflation continued to ease. The Dow Jones Industrial Average rose 0.33% on the week, while the S&P 500 gained 0.75% and the tech-heavy Nasdaq Composite added 0.94% .
Stocks saw a mixed session Friday ahead of the Christmas weekend but remained near all-time highs. The Dow slipped 12 points, while the S&P 500 rose 3 points, or 0.08%, inching to within 0.6% of its record closing high. The Nasdaq gained 20 points, or 0.2% .
For the full week, the Dow added 0.3%, the S&P 500 climbed 0.8% and the Nasdaq jumped 1% for its sixth straight weekly advance. The winning streaks have been fueled by cooling inflation readings, which have supported investor hopes that the Federal Reserve could slow its pace of interest rate hikes starting as soon as early 2023 .
“It’s just a slow drift toward the old highs here and it’s a nice way to end the week,” said Ryan Detrick, chief market strategist at Carson Group. “It looks like we could have one of the best Decembers in 40 years and that really is putting a nice bow on the end of a crazy 2022.” 
Key Inflation Gauge Drops Further, Supporting Dovish Fed
Stocks saw a mixed final session of the week as investors awaited a key inflation report that could provide further evidence of slowing price pressures.
The personal consumption expenditures (PCE) price index rose 0.1% in November from the prior month, down from a 0.3% monthly gain in October, according to Commerce Department data released Friday morning . The Fed’s preferred inflation gauge also cooled on an annual basis for a fifth straight month.
The core PCE index, which excludes volatile food and energy costs, was up 0.2% last month and 4.7% over the past year – the slowest 12-month pace since October 2021 and landing close to the Fed’s long-term 2% inflation target.
“It was the fifth straight easing in the annual rate and pulls the Fed’s favored inflation indicator down toward their long-elusive 2% target,” said Mark Hamrick, senior economic analyst at Bankrate .
The latest inflation statistics landed close to economist estimates and added to evidence that aggressive Fed rate hikes over the past year are helping cool the economy and tame the hottest inflation in decades. Slowing price increases have fueled investor optimism that the central bank could dial back and eventually pause its tightening campaign, helping extend the year-end Santa Claus rally on Wall Street.
Table 1: Key inflation indicators
|PCE price index
|Core PCE price index
Commerce Department data released December 23, 2023
Fed Chair Jerome Powell said last week the central bank could start moderating rate hikes as soon as December’s policy-setting meeting while also cautioning rates may need to stay higher for longer to ensure inflation continues easing back toward the 2% goal. Investors expect the Fed to downshift to a half point rate hike on December 14 while bracing for rates to peak around 5% in early 2023 before cuts materialize later in the year or in 2024 .
Stocks Eye Longest Rally Since 1996
U.S. stocks are on pace for their longest streak of weekly gains since 1996, shrugging off lingering worries about inflation and consumer spending to close in on fresh record highs amid renewed optimism over corporate earnings .
In the past eight weeks the S&P 500 has rallied 13.4% since mid-October as inflation shows signs of having peaked. Investors are increasingly betting that cooling price pressures will allow the Federal Reserve to soon pause interest rate hikes, setting the stage for rate cuts later next year that could re-accelerate economic and profit growth.
“It’s really stunning how strong this rally has been,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments. “It shows there’s still a strong fundamental backdrop supporting stocks.” 
Analysts highlight strengthening consumer balance sheets even as spending shows some signs of moderating. Job growth also remains resilient and wage gains are outpacing inflation for many workers.
Meanwhile, fears of an imminent recession have faded for now. Economists still expect slower economic growth in 2023 but see chances fading for an outright downturn barring some new shock or financial stress. 
All 11 S&P 500 sectors remain positive over the past month, a signal of broadening bullishness, according to technical strategists at Bank of America Global Research. Further stock gains into January could reflect improving investor sentiment, still largely skeptical and risk-averse, they added. 
Fed Rate Hike Outlook Supports Stocks
Expectations that the Federal Reserve could pause its rate hike campaign by mid-2023 have been a tailwind for stocks during the recent rally. Policymakers telegraphed plans for smaller rate increases going forward after approving a 50 basis point hike on December 14, down from four straight 75 basis point moves.
“The cumulative tightening in U.S. monetary policy has now reached significant levels,” said Fed Chair Jerome Powell, while reiterating that rates would likely need to stay elevated “for some time” to rein in inflation. 
Futures traders now see just over 5% odds that the Fed cuts rates by its June policy meeting, but those chances jump to around 50% for the September and November gatherings, according to the CME Fedwatch tool. That relatively dovish rate outlook has sparked a “fear of missing out” among previously sidelined investors. 
“Investors are increasingly confident that the Fed is very close to ending its rate hiking cycle,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “The likelihood is that the funds rate will then remain relatively stable for an extended period in 2023, and that’s positive for both the economy and markets.” 
However, some strategists warn investors against getting too comfortable with the recent string of positive data surprises on inflation, contending that price spikes stemming from still-strong labor markets and other factors could still emerge.
“There are good reasons to temper enthusiasm about disinflation trends so far,” said BlackRock Investment Institute analysts in a recent note, warning trends have not decisively turned lower. 
Corporate Earnings Growth Forecast at Historic Average
Stocks also got a lift Friday from corporate news, as economic bellwether FedEx posted stronger-than-expected earnings. Shares surged 7% after the package delivery company beat Wall Street’s targets for quarterly revenue and profit. FedEx also issued an upbeat full-year earnings forecast thanks to firming demand, ongoing pricing power and cost cuts. 
The latest batch of company updates comes ahead of fourth quarter earnings season set to kick off in mid-January. S&P 500 profits are on track to top analyst estimates for a second straight quarter, according to Refinitiv. Companies across industries continue showing resilience amid a murky economic picture.
For 2023 overall Wall Street expects per-share earnings growth of about 5% for S&P 500 companies, roughly in line with the index’s historic average, according to FactSet. Firming profit trends after months of sharp downgrades have offered another pillar of support for the recent rally. 
“The U.S. economy is remarkably resilient,” said Nancy Davis, founder of quant asset manager Quadratic Capital. “Recession fears have come down. People are looking forward to 2023 and thinking things don’t look so bad.” 
Uncertainty Still Looms Heading Into 2023
Despite the recent streak of good news on corporate profits and inflation, uncertainty still hangs over financial markets with major questions unresolved heading into the new year.
It remains unclear just how long it could take for the Fed to decisively tame inflation back to its 2% goal. Policymakers have cautioned they expect to keep rates elevated for some time to ensure price stability takes hold. Any hints of renewed inflationary pressure could upset the recent market calm.
Geopolitical tensions also linger following Russia’s invasion of Ukraine early this year. A Western push to cap prices on Russian oil exports has stirred vows of supply retaliation. Meanwhile, COVID remains an wildcard as China battles a surge in infections after unwinding its zero-COVID policies. 
From a technical perspective the U.S. stock market looks “overbought and overloved,” according to Bank of America strategists. While positive sentiment surprises could spark a melt-up early next year, they expect headwinds to eventually resume.
“We think risks remain elevated as we move into 2023,” the analysts wrote Friday. 
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