Stocks Decline for 2nd Straight Week Amid Recession Fears

Our Views

Tom Lee, CFA
Tom Lee, CFA, CFA
Head of Research

Tuesday’s November CPI was a major downside read, with Headline CPI coming in at +0.1% vs Street 0.3% and Core CPI coming in at 0.2% vs Street 0.3%

  • Last month, our analysis showed “soft” Oct CPI was repeatable, and it was
  • Details show that the downside “soft” Nov CPI repeatable

The trend is obvious:

  • Food is slowing 2 months in a row
  • Energy tanking, matching the roundtrip in oil, diesel and gasoline and even natural gas
  • Used cars falling -36% rate
  • Shelter slowing visibly and now matching the tanking of market-based measures of home prices and rents
  • Medical care services is falling at -40% rate and repeatable due to annual adjustment (see our other CPI reports)
  • 1M annualized core CPI now 2.4% vs 3.6% last month
  • 3M annualized core inflation is now down to 4.18% (was 5.56% last month)

The bond market called the Fed right in 2022 and now says the Fed will be dovish in 2023… even if Fed doesn’t know it yet

This year, the bond market again proved its storied ability to see the future path of the economy, well before equity markets and well before the Fed. Take a look at the Fed’s forecast for Fed Funds from its December 2021 SEP (Summary Economic Projections):

  • FOMC anticipated YE 2022 Fed Funds of 0.9%, or 80bp of hikes in 2022

But by January 2022, the 2-yr yield (a proxy for where markets see Fed Funds heading) was already at 0.90%.

  • 2-yr screamed the Fed was behind the curve by January 2022

The bond market anticipated the Fed would need to drastically step up pace of hikes to +75bp by June 9th

  • And by early June, the 2-yr said the Fed needed to step up the pace of hikes:
  • notice the spread 2Y less FF jumped on June 9th
  • this is right before the Fed stepped up hikes to +75bp
  • Nick Timiraos of WSJ wrote his +75bp article on June 12th, 3 days after the bond market priced in +75bp
Read the Latest First Word
Mark L. Newton, CMT
Mark L. Newton, CMT
Head of Technical Strategy
  • SPX weakness nearing minor support; Bounces could prove short-lived to 4050
  • WTI Crude looks to be rolling over after hitting strong resistance; US Dollar showing increasing short-term evidence of trying to bottom out
  • The strongest cycle this year revolves around the 80-day trading day cycle for SPX.  This has pinpointed most of the highs and lows this year and suggests that markets are peaking out now and should fall into January, followed by a spike into mid-February.
Read the Latest Technical Strategy
Brian Rauscher, CFA
Brian Rauscher, CFA
Head of Global Portfolio Strategy and Asset Allocation
  • In my view, the stage has been set by the Fed and their clearly articulated hawkish intentions.  The critical point that remains is: will Chair Powell and Gang have to go higher for longer or will the data considerably soften in a way that ultimately allows them to be lower for shorter.  There will be ongoing debate and disagreement as we move into 1H23, but my work is suggesting that the inflation fight will be a hard drawn-out battle.  
  • When combining this view with my ongoing concerns that forward earnings expectations remain too high and will need to fall and that valuation levels still need to be adjusted lower, I reiterate my view that there is still considerable risk for equity investors as we end the year.  
  • Thus, my conclusions are the same — sell tactical rallies, have more cash than normal, watch exposures, be properly hedged, and be on full alert for opportunities that will become more likely in the coming six months.
Read the Latest Wall Street Whispers
Adam Gould, CFA
Adam Gould, CFA
Head of Quantitative Research
  • Our market valuation methodology shows equities as overvalued relative to investment-grade fixed income. We expect muted returns and elevated volatility for the equity market in the coming months.
  • The Reddit retail investor indicator I track remains high, meaning many retail investors are positive on the market. That’s typically a reliable contra-indicator, and this week’s selloff is no outlier. 
  • Idiosyncratic risk is growing: Stock-specific strategies designed to identify outperformers should realize better performance in the coming months.
Read the Latest Quantitative Strategy
Sean Farrell
Sean Farrell
Head of Crypto Strategy
  • Layer-2 activity on Ethereum remains encouraging. This trend has maintained impressively with solid fundamentals since Q2 of this year.
  • A recent complaint filed by Fir Tree Partners has clouded the picture for DCG, and recent chatter around Binance reminds us that regardless of exchange size, the safest way to store digital assets is in one’s self-custodial wallet.
  • We think idiosyncratic risks continue to skew the asymmetry of returns to the downside in the immediate term (1-4 weeks). Still, over a longer-term horizon (1+ year), this is likely a favorable entry point for ETH and BTC.
Read the Latest Crypto Strategy
L . Thomas Block
L . Thomas Block
Washington Policy Strategist
  • Tonight’s government shutdown threat has been averted, but another one looms for December 23. 
  • The Senate vote on the short-term was bipartisan at 70-19. All 19 “no” votes were cast by Republicans who want a CR that runs until March 2023. 
  • Many in Washington believe likely incoming Republican Speaker Kevin McCarthy is talking NO but hoping YES on the year-end spending bill.
Read the Latest US Policy

Key Takeaways

  • The S&P closed Friday at 3,852.36, down 2.2% for the week. The Nasdaq closed the week at 10,705.41, down nearly 3%.
  • Inflation cooled notably in November, welcome news for the Federal Reserve’s fight against 40-year high inflation. Eighteen months of rapid price increases are beginning to meaningfully abate, in line with Tom Lee’s view.
  • The Federal Reserve raised its key interest rate this year for the seventh time and signaled more hikes will come, causing renewed fears of a recession in 2023.

Good evening,

Stocks continue to sink, dragging markets further down for a second consecutive weekly loss. The S&P 500 closed Friday down 19.68% on the year, despite a CPI print Tuesday showing that inflation is cooling. Core CPI, which excluded the more volatile food and energy components, rose +0.2% month-over-month, the smallest advance in 15 months (August 2021) and below the consensus of +0.3%. 

But Wednesday, after the Federal Reserve raised its key interest rate for the seventh time this year, Chair Jerome Powell said more hikes are in store. “The inflation data in October and November show a welcome reduction,” he said, “but it will take substantially more evidence to give confidence in a sustained downward path.”

That was exacerbated Thursday when the November retail sales report was unexpectedly weak, prompting concern over the health of the U.S. consumer, which has been the driver of a better-than-expected economy in 2022. It has been a challenging year for most investors, marked by volatility. Consider:

  • Thursday marked the tech-heavy Nasdaq’s 84th move of 2% or more in either direction this year
  • That’s more than in 2008 and on pace for the most such moves since 2002
  • After years of easy money and stimulus, volatility has gripped markets
  • All told, the S&P is down 19.68% YTD, Nasdaq down 32.38%, and the Dow has fallen 10.02%. Since 1926, stocks and bonds have only had three years of combined negative returns: 1931, 1969 and 2022

Amid the volatility, market sell-off, and recessionary fears, Tom Lee, our co-founder and Head of Research, hosted his 2023 market outlook, which you may review here. Lee explained why his work shows the stock market will rally 18% in 2023 as the economy sticks a soft landing. His year-end forecast is 4,750, partly because “the U.S. economy is remarkably resilient in the face of rapid Fed hike cycles,” he said. 

Added Lee: “The 2022 crisis is now shifted into opportunities, creating the highest possibilities for >10% returns since 2020.”

Lee said inflation is cooling rapidly and “falling like a rock,” meaning rate hikes should end early in 2023. He noted that it’s rare for the S&P 500 to post back-to-back negative return years. Since World War II, each instance of a negative gain for the S&P 500 in a calendar year was followed up by a positive annual return 86% of the time.

“The plurality of equity investors expect an inevitable recession as the Fed hikes until it breaks something,” Lee said. “But a ‘soft landing’ is the highest probability.”

If corporate earnings do not grow next year, as many analysts expect, that doesn’t mean stocks can’t go higher. Lee also cited many instances in which double-digit market gains occur in a year with zero or even negative EPS growth. Tailwinds include a weaker US dollar, supply chains easing, and China re-opening its economy. Lee expects S&P 500 earnings per share to “grow modestly” in 2023 to $250, from an estimated $220 in 2022. Asked later in the Q&A portion of the webinar, about potential risks or challenges to his constructive 2023 outlook, Lee said inflation staying high would hinder markets. 

Lee also explained his top three sectors for 2023: Technology, Energy, and Industrials. Review why by reading his 2023 outlook slide deck and the webinar replay here (50 minutes).


In the UK, Chancellor of the Exchequer Jeremy Hunt warned on Monday that the British economy would “get worse before it gets better,” reporting that it shrank 0.3% between August and October. Hunt’s warning echoed the Bank of England’s, which had previously warned that a downturn could continue well into 1H2024. Meanwhile, the country is bracing for a series of labor stoppages. On a positive note, inflation fell in November to 10.7%, down from October’s 11.1%, which was a four-decade high.

China’s pivot from its zero-COVID policy continued with the shutdown of its mobile phone-based location tracking service, a little more than a month before the travel-intensive Chinese New Year holidays. Despite the lockdowns’ costs to the Chinese economy (and to a limited extent, the global economy), there are worries that with them lifted, a wave of new infections is coming that will hit a Chinese healthcare system that is still not prepared to deal with them.

The U.S. Department of Energy announced on Tuesday that scientists have, for the first time, successfully produced a nuclear fusion reaction with a net energy gain. Previous controlled nuclear fusion reactions had required an enormous energy input that made the energy generated not worth the effort. Scientists from Lawrence Livermore National Laboratory used 192 lasers to put in 2.05 megajoules of energy, generating 3.15 MJ of fusion energy output – more than 50% more energy than was put in. The next major challenge would be to sustain the reaction long enough to power electric grids. 

And finally: With Tesla’s yearlong drop in share price, Elon Musk has ceased to be the world’s richest man, according to Forbes and Bloomberg. As of this week, that title belongs to Bernard Arnault, CEO of luxury-goods conglomerate LVMH.

By the way, we’d like your feedback. How are you enjoying this weekly roundup? We read everything our members send and make every effort to write back. Please email thoughts and suggestions to

Important Events

Chicago Fed National Activity Index November
Thu, Dec 22 8:30 AM ET

Prior: -0.05

The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure.

Leading Index November
Thu, Dec 22 10:00 AM ET

Est.: -0.4% Prev.: -0.8%

The Conference Board Leading Index attempts to forecast future economic activity based on ten key variables.

Personal Spending November
Fri, Dec 23 8:30 AM ET

Est.: 0.1% Prev.: 0.8%

Measures the value of the goods and services purchased by, or on the behalf of, U.S. residents.

Stock List Performance

Strategy YTD YTD vs S&P 500 Inception vs S&P 500
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