Worries About the Fed and Earnings Grew as 2022 Ended: December Recap

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Stocks begin the New Year under a cloud of pessimism as investors brace for higher interest rates and lower earnings.

The S&P 500 slid 5.9 percent in December, resulting in a 19 percent drop for all of 2022. It was the stock market’s worst year since the 2008 financial crisis. Other indexes like the Nasdaq-100 and Dow Jones Industrial Average had similarly bearish performances.

The Federal Reserve’s hawkish monetary policy is the most immediate concern and could remain an issue this week. Minutes from the last meeting are due at 2 p.m. ET tomorrow. St. Louis Fed President James Bullard, a leading hawk in 2022, speaks Thursday afternoon. Employment numbers on Friday could also impact rates. See the list below for more key economic events.

Weak earnings are the next challenge, especially with quarterly results due in late January and early February. Analysts have been lowering their estimates for the fourth quarter and now see profits shrinking 2.8 percent. That’s down from a forecast of 3.7 percent growth in September. It would also be the first drop in over two years, according to FactSet.

Tesla (TSLA), daily chart, showing key events in 2022.

Tesla’s Historic Drop

TradeStation data shows 10 of the 11 major sectors down in 2022. Growth-focused groups fell the most. Communications, home to advertising-reliant companies like Meta Platforms (META), Walt Disney (DIS) and Alphabet (GOOGL) were some of the big decliners. Consumer discretionaries, dominated by Tesla (TSLA) and Amazon.com (AMZN), were the second-worst performers.

TSLA lost almost two-thirds of its value, only its second negative year since going public in 2010. It also fell 37 percent in December — its worst month ever and the sharpest decline in the S&P 500. Fears of weaker electric-car demand were confirmed yesterday when deliveries missed estimates.

Energy was the only gainer, jumping 58 percent. The sector accounted for all 10 of the S&P 500’s top performers, led by Occidental Petroleum (OXY) and Hess (HES).

S&P 500, daily chart, showing key technical patterns.

Charting the Market

Stocks begin 2023 with the S&P 500 trying to hold 3800. The index is back under its 50-day moving average, which could suggest its trend has turned bearish again. It’s also been unable to get above a falling trend line that began at the start of last year.

At least two other charts could influence trading. First, Cboe’s volatility index (VIX) has lingered at the bottom of its range. A rebound would typically weigh on stock prices. Second, the 10-year Treasury yield started climbing last week. Further increases could hurt sentiment (as happened in early 2022).

Big Movers in December

Top Gainers in the S&P 500 Last Month
United Health Services (UHS)+7.7%The hospital operator continued to climb after a strong quarterly report in October.
Organon (OGN)+7.3%The drug maker climbed as risk-averse investors favored health-care stocks.
Align Technology (ALGN)+7.2%The maker of orthodontic products held its ground after losing three-quarters of its value since mid-2021.
Nike (NKE)+6.7%Strong North American demand drove results ahead of estimates. Some analysts are also hopeful of Chinese sales recovering as the Asian country reopens.
Teleflex (TFX)+6.6%The medical-device maker continued to rebound from a 5-1/2 year low.
Source: TradeStation Data
Top Decliners in the S&P 500 Last Month
Tesla (TSLA)-37%The electric-car maker had its worst month ever as demand weakened and CEO Elon Musk faced distractions following his purchase of Twitter.
Norwegian Cruise Lines (NCLH)-26%The cruise line fell as analysts worried about cost pressures and high debt levels. The stock had rallied more than 50% between mid-October and mid-November.
NRG Energy (NRG)-25%The utility company paid a 33 percent premium to acquire Vivint Smart Home (VVNT). It surprised investors who expected NRG to spend its cash on share buybacks.
Albemarle (ALB)-22%The lithium producer slid along with the metal’s price.
CF Industries (CF)-21%The fertilizer continued to fall after a weak quarterly report in November.
Source: TradeStation Data

Sector Watch

The table below shows sector performance last month.

Utilities-1.3%
Health Care-2.3%
Consumer Staples-3.4%
Industrials-3.5%
Energy-4%
Financials-5.8%
Real Estate-5.9%
S&P 500-5.9%
Materials-6.1%
Communications-6.8%
Technology-8.5%
Consumer Discretionaries-12%
Source: TradeStation Data

Key Economic Events in December

Below are some key economic events from last month.

  • Data shows more strength in the job market: Non-farm payrolls and wages rose more than expected in December, while unemployment fell more than expected. While the news was positive for the economy, it fueled worries about interest-rate hikes. (12/2).
  • Inflation slows much more than expected: Consumer prices rose just 0.1% in November, less than the 0.3 percent estimate. Core inflation, which excludes food and energy, was also cooler than feared (12/13)
  • Fed hikes rates, gives a hawkish outlook: The Fed raised interest rates by 50 basis points and provided hawkish guidance for policy. Its quarterly projections anticipated slower economic growth, higher unemployment and a higher maximum interest rate. (12/14)
  • Retail sales crater as the auto sector slows: Retail sales dove 0.6 percent in November, twice the forecast decline. Big-ticket items like furniture and automobiles contracted, a potential sign of weaker economic growth. (12/15)

What Experts Are Saying

Below are some noteworthy commentaries.

  • Redfin forecasts slowest housing market in a decade: Redfin sees home sales falling to the lowest level since 2011 because of higher mortgage rates. House prices are also expected to have their first year-over-year decline in a decade. (12/6)
  • Airlines expect first profitable year since pandemic: Airlines will have positive earnings 2023 for the first time in four years, according to the International Air Transportation Association. The industry expects a $4.7 billion net profit, compared with $26.4 billion in 2019. (12/6)
  • Paul McCulley predicts Fed pivot as inflation slows: Paul McCulley, former chief economist of PIMCO, expects a Fed pivot as inflation slows. Policymakers will stop hiking interest rates and potentially ease policy in 2023, even without a recession, he predicted. (12/12)
  • Job cuts coming to Wall Street?: Goldman Sachs will cut hundreds of jobs in 2023, Bloomberg News reported. Other outlets including Forbes ran stories in December forecasting potentially significant layoffs early in the New Year. (12/12)
  • Wealthy investors expect another bearish year: Some 56 percent of millionaire investors expect stocks to fall double digits in 2023, according to a CNBC survey. It was the most pessimistic since 2008. However 81 percent of millennial millionaires think the market will advance. (12/19)

Popular Futures Contracts in December

ProductCurrent
Month
ExpirationNext
Month
1-Mon%
S&P 500 E-Mini (@ES)ESH23 (Mar)3/17/23ESM23-6.1%
Nasdaq-100 E-Mini (@NQ)NQH23 (Mar)3/17/23NQM23-9.3%
Dow Jones E-Mini (@YM)YMH23 (Mar)3/17/23YMM23-4.5%
Russell 2000 E-Mini (@RTY)RTYH23 (Mar)3/17/23RTYM23-6.9%
Source: TradeStation Data

Newsworthy Events This Month

DateEventWhat to Watch For
Wed 1/4Federal Reserve minutesDetails on future central bank plans after policymakers surprised investors with hawkish outlooks in December.
Fri 1/6Non-farm payrollsWill job growth, unemployment and wages give the Fed reason to pause interest-rate hikes?
Thu 1/12Consumer price indexDecember’s Consumer Price Index (CPI) is due one hour before U.S. markets open.
Wed 1/18Retail salesWill consumers slow spending, potentially giving the Fed reason to pause interest-rate hikes?
Thu 1/26Gross domestic productDid the economy slow in the fourth quarter?

Security futures are not suitable for all investors. To obtain a copy of the security futures risk disclosure statement Investment and Trading Disclosures Booklet – Futures.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.