Wall Street is catastrophizing, as it likes to do, after a run of economic data and some ‘tough guy’ threats from Fed chief Jerome Powell has so-called financial market experts saying inflation might be on the way down but now recession is going to upset the apple cart.

One day after Powell raised the official interest rate by 0.5% and did old-fashioned jawboning (central bank speak for scaring markets, consumers and businesses not to think they’re finished raising interest rates), the Dow was down over 900 points at one stage!

Triggering this ‘fear and loathing’ overnight was a worse-than-expected retail sales number, which is making some think that the past rate rises have gone too far.

This is how Bloomberg reported the data drop: “US retail sales fell in November by the most in nearly a year, reflecting softness in a range of categories that suggest some easing in Americans’ demand for merchandise. The value of overall retail purchases dropped 0.6% last month after rising 1.3% in October, Commerce Department data showed Thursday.”

Jerome Powell, like our own Dr Phil Lowe, says he will be data driven in making further rate rising decisions, and this one has many really worried about a looming recession.

Of course, economists and Wall Street expert commentators have tipped eight of the last two recessions and the bond market isn’t much better, so I’d argue that it’s all a chance of happening and not happening.

I’m in the mild recession camp for the US but they could still get away with a substantial slowdown, but for me the big question is: what happens to stocks and stock markets with recessions?

Clearly, a recession can be bad for individual stocks so consumer discretionary retailers would lose friends but recession-proof businesses like Woolworths and Coles would do OK.

So it’s picking winners and losers stuff for stock players. But what about overall market indexes? How do overall stock markets perform with recessions?

The US stock market indexes (the S&P 500 and Nasdaq) have already been in a bear market and effectively still are. The former is down 18.5% now but over the next few days could slip back to being off 20%.

Personally, I like this from bmt.com, which argues that “the good news is that the S&P 500 is already down 20%, so at least some of the damage has been done.  In fact, the behaviour of stocks during official recessionary periods as defined by the National Bureau of Economic Research (NBER) might surprise you.

Check this out:

1. Stocks usually decline most before a recession hits.

The average decline for the S&P 500 during the past 10 recessions is only 2.2% while the median decline is only4.9%.

2. Stocks are sometimes up during recessions.

The S&P 500 was positive in four of the past 10 recessions, including the early 1980s when the Fed was aggressively fighting inflation.

3. Stocks often begin to recover before a recession ends

The average return from the cycle’s peak (often before the recession starts) to the end of the recession is -15.3%, even if the average peak-to-trough decline is much larger (about 36% in the average Bear Market).

4. The average return one year after a 25% or more decline is far above average.

Since 1960, there have been eight declines in the S&P 500 of 25% or more (the current decline would make it 9).  One year later, the average return is nearly23%.

And this chart shows that stocks can rise during a recession.

The sell-off we’ve seen this year was partly driven by the view that aggressive rate rises by the Fed could create a recession, and if a recession is deeper than the Fed wants, it would cut rates and stock markets would love that. Mind you, I suspect any recession we see will be mild and that could make those who’ve sold off stocks fearing a bad recession, would then become buyers, which would help stock prices in 2023.

The bottom line is — don’t let recession headlines over-worry you.

Just when it looked like Wall Street and the US statistician were set to ‘scrooge’ Christmas with a “bah humbug” inflation reading, the opposite has happened. Instead of a disappointing November CPI, which the stock market has been stressing about since last week because of some strong US economic data, along comes a better-than-expected inflation result.

As the Volunteer song goes, it looked like a good, good day was there for stocks on this inflation data drop and the Dow futures spiked over 800 points on the news and the actual Dow went for a big spike higher, over 400 points but it then sold off! That said, while the Dow had its doubts about the implications of the number, the Nasdaq was far more positive about the 0.1% rise in the CPI for November, which took the annual inflation reading to 7.1% from 7.7% the month before.

The tech-heavy Nasdaq, which hates rising interest rates, was up 0.89% while the S&P 500 was 0.56% higher, as it too is influenced by tech stocks.

Normal people might have expected a bigger and more positive response to this good inflation number but the Wall Street worry warts are now focused on what the Federal Reserve will make of the number.

This CNBC commentator summed up the muted market reaction to this better-than-expected inflation result.

“While the inputs of inflation coming into that Fed meeting are modestly better, we still don’t know for sure if the Fed’s going to raise by 50 basis points, if they’re going to raise their terminal rate. So, we have quickly shifted gears into a mode of ‘wait and see’ for the Fed meeting tomorrow,” said Art Hogan, chief market strategist at B. Riley Wealth.

The interest rate committee of the US central bank is meeting now and tomorrow will probably raise the official interest rate by 0.5% and then make comments that could hurt or help stocks.

Undoubtedly, reference will be made on the success of lowering goods-driven inflation but services/wages inflation still is at 7.3% and that has put a lid on stock market enthusiasm.

That will be the big watch for 2023 but I think the impact of these interest rate rises are pushing the US and our economy in the right direction in lowering inflation and that will eventually help stocks recover next year.

I often use my Rachel Hunter line from the Pantene TV commercial of many years ago to describe improved economic trends heading towards a desired goal, such as normal inflation and a rallying stock market, and it goes like this: “It won’t happen overnight but it will happen.”

So, what’s the impact of this better US inflation number on us?

1. It’s good for stocks and we could see the mother of all Santa Claus rallies coming into Christmas, which will be good for our super funds.

2. It could make the RBA less worried about slowing up interest rate rises as there will be less pressure from the US Fed.

3. There could be less worries about too many interest rate rises, which should slow up house price falls.

4. Our dollar will rise as the greenback has been powered along by its big 0.75% rate rises. It’s up to 68.5 US cents this morning.

5. There could be more recession fears in the US, which could curb the enthusiasm for stocks but the likelihood of less rate rises will be good for tech and growth stocks, as the Nasdaq showed overnight.

6. Business and consumer confidence will be helped if the inflation is on the slide here.

7. It should help growth in 2023 be higher than is currently being predicted by the RBA and Treasury.

We might not get a good, good day on this good inflation result but we’re heading in the right direction for stocks in 2023. I can’t ever be certain about when a stock market will rise or fall but the trend is your friend until it bends and this inflation number is good for the stock market trend, which we’ve seen for the past six months and the past two months, in particular, as you can see below.

S&P/ASX 200

That’s a 7.74% rise since June 14!

The reality that central banks may be unable to curb inflation and avoid recession struck home last week as nervous investors sent stock markets into a downward spiral.

In the US the Dow Jones Industrial Average and S&P 500 fell 0.9% and 0.73% respectively on Friday following a data release of wholesale prices that was higher than expected.

This week the US Federal Reserve is expected to increase interest rates by 0.50%, lower than the past three consecutive 0.75% increases, but still a burden for businesses and families struggling with the rising cost of living.

The US will also release latest Consumer Price Index numbers on Tuesday. The outlook it indicates for inflation will likely impact sentiment for the remainder of the trading year, but it is becoming clear central banks still have considerable work to do to tame inflation across the globe.

A bright spot for markets was the sudden reversal of zero-COVID-19 policies in China last week, increasing expectations the economic behemoth will increase its economic activity. However, the latest wave of COVID-19 infections is on the rise in key cities like Beijing, and it is yet to be determined just how quickly spending patterns may normalise and whether Chinese firms will experience severe labour shortages as employees call in sick.

Optimism over China’s reopening sent European markets higher on Friday, but it was insufficient for US markets to override fears on inflation.

Source: nabtrade

Locally, there is no Reserve Bank meeting this month to set the tone on interest rates, so local markets will take the lead on inflation expectations from the US.

On Friday the S&P/ASX200 broke a three-day losing streak and notched up a 0.53% gain to 7213.20 points. However, over the week the index closed 1.21% lower.

Energy, financials and information and technology stocks were hit the hardest.

Source: nabtrade

Also, during the week lithium producer Pilbara Minerals (PLS) joined the S&P/ASX Top 50 index, while international property and infrastructure group, Lend Lease Corporation (LLC), was removed.

The share price of Lend Lease has collapsed 31.43% year-to-date. It hit an intra-year high of $12.25 in May but closed on Friday at $7.33.

It is not such a bearish picture in the materials space, despite growing expectations of a widespread global recession. Mining giant BHP Group (BHP) hit an intra-year low of S35.24 in September but closed on Friday at $47.48. Fellow miner Rio Tinto (RIO) followed a similar trajectory over the same period from a low of $84.74 to Friday’s close of $117.16. The previously mentioned Pilbara Minerals was down at $2.00 mid-year and in November hit an intra-year high of $5.52. It closed Friday at $4.47.

The rise of the lithium stocks is a well told story, but it’s been strength in the iron ore price and expectations of stronger Chinese consumption that have driven the global miners.

Source: nabtrade

In financials, the big banks are clawing their way back since lows hit mid-year but still have a way to go to reach intra-year highs achieved back in March-April. National Australia Bank (NAB) closed Friday up 7c to $30.19, while Westpac Banking Corp was up 15c to $23.44 and Australia and New Zealand Banking Group (ANZ) up 5c to $23.64.

In consumer stables, Woolworths (WOW) closed Friday up 14c to $34.45 but is down 10.45% year-to-date, while Wesfarmers (WES) closed Friday 7c lower at $47.92 and is down 20.16% year-to-date.

The market this morning is expected to open lower based on the ASX SPI 200 Futures trading down 35 points (-0.48%) to 7183.00 points.

Analysis as at 12/12/2022. This information has been provided by WealthHub Securities Limited ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities). WealthHub Securities is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL No. 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.

1. Good US inflation number

The US registered a better-than-expected CPI reading and Wall Street had an unexpected reaction. The November inflation reading came in up 0.1%, while economists thought the number would be 0.3%. This took the annual inflation story down to 7.1% from 7.7% in October and 8.1% in September. Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% on an annual basis, compared with respective estimates of 0.3% and 6.1%.

2. Wall Street’s reaction to CPI surprising

The first reaction to the November CPI coming in lower than expected was an 800 plus rise for the Dow Jones futures and the real life index surged early but then there was a sell-off! Those trying to work out why the change of heart about the number says the services component of the CPI remains high — 7.3% — and the Fed’s boss, Jerome Powell, has said that this is an important indicator he needs to see slide before he can tip rate rises are near an end, or words to that effect.

3. Confidence says RBA’s job is nearly done?

Interest rate rises from the RBA have been designed to lower inflation and if you look at business and consumer confidence, those rate hikes are working to stop the country’s spenders — consumers and business. The Westpac-Melbourne Institute consumer confidence index rose by 3% in December to 80.3 points but its long-run average is 101.2 points and any number under 100 means pessimists are greater than optimists. Meanwhile, the National Australia Bank (NAB) business confidence index fell from -0.2 points in October to an 11-month low of -4.4 points in November (long-run average: +5.3 points).  These bad news readings would be good news for the RBA’s Dr Phil Lowe and mortgagees praying that AMP’s Shane Oliver is right when he says the RBA’s rate-rising job might be done!

4. CSL has a new boss

The AFR reports: “The country’s third-biggest company, blood products giant CSL, will start a new chapter in its storied history after the promotion of chief operating officer Paul McKenzie to chief executive on Tuesday.” The in-house appointment will be a plus for the company that has been a great stock market performer and another plus for the business and the stock price, the current CEO, Paul Perreault, will remain a strategic adviser to the company until September when he retires.

“Dr McKenzie said he looked forward to returning CSL to “sustainable and profitable growth”, after the company took a 5% hit to net profit in the year to June 30 due to a hangover effect of lower plasma donations during the COVID-19 pandemic.

5. ASX to cop competition

The Australian says the Albanese Government has the ASX’s monopoly in its sights. “Acting on recommendations by the Council of Financial Regulators, the government is pushing forward with a spate of measures including providing the RBA with powers to intervene and resolve a crisis at a domestic clearing and settlement facility,” Joyce Moullakis reports. “The government will also outline on Wednesday plans to introduce legislation to boost competitive outcomes, where the ASX has a near monopoly in clearing and settlement, delivering the competition and corporate regulators additional powers. It wants more competition in the clearing and settlement of cash equities trades, following a turbulent operational period for the ASX.” By the way, the news did not hurt the company’s share price which rose 1.35% to $69 yesterday.