Inflation Data Remains Key Driver for the S&P 500 This Week

In the last week ended on December 9, mixed economic data drove equity indices lower. Investors and Wall Street are concerned over the possibility of a recession in the United States as the Federal Reserve remains rigid about lowering inflation rates.

The Dow Jones fell 2.8%, while indices such as the S&P 500 and Nasdaq fell by 3.4% and 4%, respectively, in the last five trading sessions. Treasury yields had a slow start to the week before rebounding higher. Crude oil prices continued to lose momentum as a worsening global outlook continued to impact demand. The price of the West Texas Intermediate (WTI) crude fell 10% to $71 per barrel.

The Securities and Exchange Commission recently issued a new set of guidelines for companies that now have to disclose their crypto exposure to shareholders. The ripple effects following the collapse of FTX and other major crypto players in 2022 are now beginning to spread.

What next for the S&P 500 and investors?

The BLS or Bureau of Labor Statistics will release the Consumer Price Index (CPI) data for November on Tuesday, which is an indicator of inflation. Prices are expected to rise 7.6% year over year, compared to the 7.7% gain witnessed in October and a peak of 9.1% in June.

Core inflation data excludes energy and food costs and is expected to rise 6.2% year over year, compared to 6.3% in October and a four-decade high of 6.6% in September.

The FOMC (Federal Open market Committee), which sets interest rates, will conclude the monetary policy meeting for December on Wednesday. Wall Street expects interest rates to increase by 50 basis points this month, setting benchmark rates between 4.25% and 4.5%. The Fed has increased benchmark rates by 375 basis points in 2022, which is the fastest monetary tightening cycle in more than 40 years.

Retail sales data for November will be reported on Thursday. A key indicator of consumer spending, retail sales might fall by 0.1% in November (compared to the prior month) and rise 7.9% year over year. Despite higher input prices, retail sales continue to surge higher.

Finally, the personal savings rate has fallen to the lowest level since 2005 to 2.3% as consumers are spending a higher proportion of their income to finance purchases.

Will the S&P 500 index experience another sell-off?

According to Rich Weiss, the chief investment officer at American Century Investment Management, the obsession with policy hikes of the Federal Reserve have blinded investors from economic realities.

The tech-heavy Nasdaq Index is up 10% from 52-week lows despite weak economic data from housing and manufacturing and several earnings downgrades.

Weiss is worried the “pivot” narrative might blindside investors from noticing deteriorating fundamentals which might accelerate the sell-off next year.

Historically, by the time the Fed pivots and aims to lower interest rates, the economy is usually too beat-up, triggering a broader market sell-off.

He explained, “The storm’s coming now. Whether it’s going be a tropical rainstorm or a Category 4 hurricane is where people are betting. It’s just a question of how severe and long-lasting it’s going to be.”

The triple threat of red-hot inflation, earnings contraction, and a restrictive monetary policy will continue to act as headwinds for equity investors in 2023.

Since the 1970s, the stock market has fallen by 24% on average after a pivot towards a more accommodative monetary policy.

Related: Have International Equity Markets Already Priced in the Worst?