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Wall Street hopes one week of woes won’t deter the Santa Claus rally

Markets dipped as higher-than-expected producer prices and growing unemployment diminished the cheer from the start of the month.

MANHATTAN (CN) — With a relatively light week of data and renewed concerns about a growth slowdown, investors turned their back on last week’s highs.

Equities suffered their worst week in months by the closing bell on Friday. All told, the Dow Jones Industrial Average shed 954 points since last Friday, the S&P 500 lost 137 points, and the Nasdaq dropped 457 points.  

The month so far hasn’t been optimal, but experts point to the historic trend of December being one of the best months of the year for equities, particularly the S&P. All eyes now turn, not just to next week’s decision on interest rates by the Federal Reserve, but also the consumer price index that precedes that decision, which many hope shows inflation is truly coming down.

“Since this year is the worst start to December since 2011, we believe in the Santa Claus rally this year,” Gina Bolvin, president at Bolvin Wealth Management Group, said in a statement. “There could be a modest melt up with light volume due to a sellers strike, and year-end positioning.”

The week had only a smattering of economic data, and the few reports that did come out did not help ease investor worries.

On Friday, the U.S. Bureau of Labor Statistics released its producer price index, which showed producer prices dropped again from 8.1% annualized in October to 7.4% in November. While the drop is certainly a welcome one, and a far cry from the 11.7% annualized inflation seen in March, prices are still likely higher than what the Fed wants to see.  

“While headline PPI advanced faster than expected in November, monthly increases are down sharply from a year ago, allowing annual inflation to cool for the fifth consecutive month,” Matthew Martin of Oxford Economics wrote in an investors’ note. “PPI inflation continues to trend downward, but economic momentum will keep it elevated until at least [the second quarter] of next year.”

Investors also got a taste Friday of how consumers are viewing the economy this month, with the University of Michigan’s preliminary consumer sentiment index getting a slight boost to 59.1. That is slightly above the forecast, but it does not wipe out the drop from November when consumers still fretted about inflation.

The university noted in its release that “concerns over high prices — which remain high relative to just prior to this current inflationary episode — have eased moderately,” and that consumers are more likely to make a major purchase now than a month ago.

On Monday, the November services index by the Institute for Supply Management was shown to have increased from 54.4 to 56.5, which is 3 points better than most analysts had expected. But the report also showed export orders dropping to the lowest point since April 2022, a point experts mostly attribute to international economic weakness.

“Headwinds from housing, manufacturing, and retail are being offset by resilience in most parts of the service sector,” said Bill Adams, chief economist at Comerica Bank. He noted that “growth will likely turn negative in the first half of 2022 as consumers tighten their belts, businesses throttle back on hiring, and the unemployment rate rises further from September’s half-century low.”

The Labor Department’s weekly unemployment report on Thursday showed initial claims rose to 230,000 for the week ending December 3, with continuing claims rising to 1.67 million for the week ending November 26.

Initial claims are still low, but continuing jobless claims are persistently rising, at their highest mark since March and nearly one-third higher over the past half year. The rapid gains in continued claims is a point of concern for some, such as Adams, who notes that “every time continued jobless claims rose as fast as they have over the past six months it has coincided with a recession.”

Comments last week by Fed Chair Jerome Powell indicate the central bank could soon pare back its interest rates, which spurred bulls on Wall Street. This week’s data likely will not move the needle much for the Fed’s decision on interest rates next week, which most experts believe will be a 0.5% rate hike. The central bank will announce its decision on December 14.

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