The best time to talk to a
Merrill Advisor? Yesterday.The best time to talk
to a Merrill Advisor?
Yesterday.

Chris Hyzy:                This is Chris Hyzy, Chief Investment Officer, for the market update for December 5th. Some economic data out over the weekend as well as Friday. The employment report on Friday was a little bit better than expected in terms of jobs growth and the focus at the beginning of the stock market session on Friday and through midday was all on average hourly earnings which were above the consensus level in terms of the tick up on it. However, the market did balance itself out and was mixed to close trade on Friday, indicating that there’s still enough money on the sidelines to buy some of the dips in the markets. Now, following on this economic report data, particularly the employment report this morning, on Monday we received the important data point on the institute for supply management gauge of services. We talked a lot about the shift in spending from goods over to services, particularly this year in 2022 and the back half of ’21 but really the momentum in ‘22 has been all about the services part of the economy which is where we still see a good portion of the employment gap and in another words, why wage growth continues to run ahead of consensus - it’s this shift to services and the services gauge gave us positive data as it relates to economic growth this morning, which ultimately is not what the market is looking for. The market’s looking for weak economic data so the fed can pause. Now, the gauge rose to 56.5. Why is that important? Because that’s three points above consensus and more importantly, it’s 6.5 above what they call the expansion level, which is generally around 50. So, this is indicating that the services economy - again, it’s one month’s data point - but this has been a trend recently. The economic health and the services part of continues to show that it’s in expansion territory. This is very different than the manufacturing side of the economy. Bond yields climbed across the board, particularly the back end of the curve and the two-year also climbed as well off of a low level that it reached earlier on last week around 4.2 or 4.25. Now, looking at oil prices, that took a cue as well from this data. They rose and they also rose off of OPEC+ announcements and they looked away from the $60.00 cap on Russian oil. They’re looking more towards the health of the economy. West Texas Intermediate oil prices got back above $80.00 a barrel, also indicating a little bit of reprieve on the downswing that we saw for much of the past couple of weeks. So, if you roll this all up, the economy continues to showcase mixed numbers. This is typical of late cycle economic moves. We expect this to continue well into next year, not just the next one or two months. We believe the late year end rally that we’ve seen off of the lows particularly in November and the early part of December is still intact, but we don’t expect a significant one from here. The technical market factors in the market are still overhanging the overall push higher. The S&P 500 index, somewhere around 4,030, is having a hard time staying above 4.050 or its 200-day moving average. It’ll need a new catalyst to break above that and stay there. Now, we think two potential catalysts that that could entail could be coming in the mid part of December. So first and foremost, in just a few short days we get inflation gauges out on December 9th, that’s Friday and then on the 14th, obviously the fed, the FOMC, the Federal Open Market Committee meeting, needs to raise rates. We still expect a 50-basis point hike but the key will be the communication coming on the back of those inflation gauges that are out just five days prior to a decision by the FOMC. We remain neutral stocks at this point and still slightly overweight bonds heading into next year. We will look for opportunities to rebalance across the board and across asset classes and risk profiles the early part of the year as we see a seasonal trending pattern particularly in late cycle moves where stocks enter another exhale in anticipation of key events. What are those key events? First and foremost, a fed pause. We expect that sometime in first quarter, but with mixed economic data in the late cycle, we should continue to see positive data and negative data forcing the hands of the fed to continue to move forward on rate hikes. So, we think a pause is upon us sometime in the first quarter. Markets will look to that queue and then they’ll start to shift back in our opinion towards earnings. Earnings, unfortunately, generally bottom later in the cycle after the market bottom. So, we expect a bottom some time in the early part of next year and a better advance in the second half and we still believe that the call for next year. Overall, all things considered on a general basis, bonds outperforming in the first half and stocks in the second half. So that’ll do it for today. Thanks for listening.

Operator:                   Please see important disclosures provided on this page.

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