Stocks Down Last Week, Just Two More Weeks Left In The Year

Plus 5 Just-Added Strong Buys Stocks Down Last Week, Just Two More Weeks Left In The Year [Kevin Matras - EVP - Photo] Profit from the Pros By Kevin Matras Executive Vice President Stocks Down Last Week, Just Two More Weeks Left In The Year [Stocks Down Last Week, Just Two More Weeks Left In The Year]Image: Bigstock Stocks closed lower on Friday and for the week. Last Wednesday's Fed announcement on rates, and Thursday's lower than expected retail sales numbers weighed on stocks. Nobody was surprised when the Fed raised rates by 50 basis points, as it was widely expected. And it shouldn't have been a surprise when they suggested the Fed Funds rate will likely hit 5.1% in 2023, and then be held at that level for a period of time, since Fed Chair Jerome Powell and other Fed members had been suggesting as much in speeches and comments throughout the last couple of months, not to mention at their November meeting. What was a surprise, however, was their lowering of next year's GDP to 0.5% from the previous estimate of 1.2%. With rates going up higher, and likely being held there for longer, the reduced GDP forecast doesn't leave much room for downside error, as that's awfully close to no growth or contraction status. And if output declines, we're talking about another recession, after having just exited this last one. And that spooked the market. And the slower start to the holiday shopping season (retail sales were down more than expected in November), suggested that inflation is taking a bigger bite out of people's finances, leaving less room for discretionary spending. The good news is that recent reports show inflation continues to decline. That's true for both wholesale inflation (Producer Price Index or PPI), and retail inflation (Consumer Price Index or CPI). It's still too high. And it could be coming down faster. But it is coming down, nonetheless, and has been steadily declining from its summer highs. With the Fed Funds midpoint now at 4.38%, they will need to raise rates by roughly 75 basis points next year to reach their target of 5.1%. With the Fed signaling their intention to slow their rate hike pace down, that suggests three 25 bps moves to come. The next Fed meeting on rates isn't until early February. In the meantime, we'll get another PPI and CPI inflation report, and another Employment report. As long as inflation continues to decline, the economy slows but still grows, and we keep adding jobs, but maybe at a slower pace with lower wage growth, those would be very positive developments for the economy and the market. That likely won't change what the Fed does in February. But it could determine where their rate hike cycle ultimately ends, i.e., do they really need to hike rates 3 more times to get to a terminal rate of 5.1%, or would 2 suffice before they call it quits? The answer to that question is months away. But each report that can show inflation coming down, and a gradual cooling of the economy and the labor market, the better that should be for the market. Even though the last two weeks have been down, stocks have performed well ever since the markets put in their key upside reversal on October 13. And given that we're still in the month of December (December is typically one of the strongest months for stocks), the odds are still favorable for an end-of-year rally. While we're at it, it's looking good for next year too, as the post-midterm effect on the market is positive (since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%). So it looks like there's plenty more upside to go. 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