Is Goldilocks back on the scene?

As we await the US jobs data later on Friday, which may well determine the message the Federal Reserve delivers to the market next week into the year-end. Stocks had a strong end to the month aided by some more good news on the inflation front. Excluding food and energy, personal consumption expenditures were up 0.2% in October, down from September’s 0.5% gain. Year-over-year, it was up 5%, also a slowdown from the September pace. Jerome Powell, in a speech ahead of next week’s interest rate meeting, reiterated the tightness of the labour market and is looking for a monthly job number of less than 200,000 in order to reach price stability. Worth keeping that number in mind later today.

Despite the recovery in stocks over the last two months, the first two consecutive positive months this year, many analysts still consider this a typical “bull rally” in a bear market. An economic recession, leading to concerns for earnings still being the main reason for the possibility that stocks will continue to struggle next year. Consensus remains stocks will be weak in the first half of next year, the S&P 500 will bottom around 3200 and then we all buy, into the second half year, the pain before the gain.

As those who read my blogs on a regular basis know that I have been slightly more optimistic about stocks the past month or so, and remain so into the year-end. I was fortunate to attend a breakfast meeting with BCA’s research chief strategist on Thursday morning. He painted a far more positive outlook for next year than many currently do.

Firstly he pointed out that for the S&P to hit 3200, that is a near 40% fall in nominal terms, quite a reaction to what may be at worse a mild economic recession. He went on to show a series of slides that demonstrate why the inflation rate will fall sharply in the coming year. This will facilitate a Fed pivot. China has effectively already abandoned its zero covid policy. Although infection rates in China are high, the mortality rate is very low. US consumption remains healthy and for this reason, there is a real possibility the economy avoids an economic recession altogether. The downgrade to expectations to corporate earnings has largely been accounted for and stocks now look far more reasonable value. Such a scenario is not what many portfolio managers are positioned for, and up would still most likely be the direction of pain.

December is historically a good month for stocks, January often not so much. Stocks are expected to open weaker this morning, as we await the jobs data later today.