Weekly Market Update

In the second half of 2022, bad economic news has largely been good news for markets and certainly this proved to be the case in November as slowing economic data (see manufacturing, housing, etc.) coupled with signs of decelerating inflation propelled the S&P 500 over 5% higher for the month. As a result, October and November became the first consecutive months of positive S&P 500 gains since August 2021, but this good news/bad news dynamic appears to be evolving. Clearly markets want economic growth to continue to slow to placate the Fed’s inflation fears, but bulls also want to avoid a sharp recession or “hard-landing” scenario, especially one that leads to meaningfully lower corporate earnings. Therefore, while good economic news has often been flagged as a headwind for markets, the reaction around multiple developments will be important to watch as investors balance Fed policy implications with hard vs. soft-landing expectations.

First and foremost, how markets navigate labor market headlines will be very telling. On Friday, for example, the November jobs report showed nonfarm payrolls and wage growth both rose faster than expected. In today’s markets, hot jobs data typically leads to market weakness as it complicates the Fed’s calculus and unsurprisingly, stocks and bonds moved lower Friday morning. However, markets strengthened off those morning lows as investors began to balance Fed implications with the rising possibility of a shallow recession should the labor market remain so resilient.

Chinese reopening headlines is another great example of an evolving good news/bad news knock-on effect. Recently, protests over China’s zero-covid and lockdown policies have led to a loosening of Chinese restrictions. However, while China moving away from zero-covid is a meaningful driver for economic growth and has largely been cheered by markets, such a policy shift could also have material inflation implications as Chinese consumption rebounds. It will be very interesting to watch how investors reconcile these economic crosswinds, particularly as the Federal Reserve gets closer to the end than the beginning of this painful tightening cycle.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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