Market Update

Market Update

Aaron Soderstrom


December 14, 2022

Market Update


  • Economy continues to slow, but the U.S. Economy is not yet in a recession.
  • Labor market is still tight.
  • Inflation is still high, but shows signs of cooling.
Primary Economic Drivers

The four primary economic factors that can explain roughly 86% of all market deviation continue to fight their trends. This counter-trend movement in the factors is pushing equity markets higher. There are better situations for macro traders in the short run. However, taking a step back, we can see that despite the market direction, the business cycle is still the main economic driver and is still approaching a recession.

Risk On Risk Off of Major Asset Classes

The Current economic environment defined by the economic driver does not support equity markets or corporate debt but supports treasuries, specifically long-duration treasuries. Another case for supporting long-duration treasuries is the market when the two-year treasuries yield drops below the Federal Funds Rate. This is likely to occur shortly after the Federal Reserve raises rates today. The only signal we would be looking for would be a confirmation in our trend model, which has been trending down all of 2022.

Domestic Equities Small Value High Yield Investment Grade Treasuries Commodities
Risk-Off Risk-Off Risk-Off Risk-Off Risk-On Risk-Off

Equity markets continue to fight the macro environment, moving up while the climate suggests that it should be falling. This is because we are in the very late stages of an imminent recession where lower inflation (typically a bad sign) is giving hope that the Federal Reserve will pull off a miracle with a soft landing. A soft landing is highly unlikely to do the long and variable lags in monetary policy and the fact that rates of 4.25% are still not yet at a neutral rate estimated to be higher than 5%.

In the short run, markets trades from emotion, but in the 6-to-12-month range, they trade off fundamentals. Our overall outlook remains on the downside until the macro environment changes.

Economic Growth

Following two consecutive quarters of negative GDP growth, 3Q22 real GDP showed the economy grew by a 2.6% annualized rate, slightly more substantial than the 2.4% consensus expectation. Much of the gains came from an upswing in trade, while beneath the surface, the economy is still losing momentum in growth and inflation. Real consumer spending continued to soften, and construction spending was very weak with the climb in interest rates. However, investment spending is still holding up, and the GDP price deflator declined markedly to 4.1% from 9% last quarter. Moreover, with pent-up demand for autos and a still very tight labor market, it’s clear the economy is not yet in recession.

Our outlook is unchanged from the previous update


The 3Q22 earnings season is ending with 90.9% of a market cap having been reported. Our current 3Q22 S&P 500 operating earnings per share (EPS) estimate is $51.17, representing a year-over-year (y/y) decline of 1.6%. So far, 57% of companies have beaten earnings expectations, and 55% have exceeded revenue expectations. Pricing power has differentiated winners and losers, as rising costs rather than deteriorating sales have accounted for weakness in earnings. Management commentary has constantly referenced the impact of higher interest rates, shipping costs, and a stronger U.S. dollar on earnings.

Omega Squared also publishes our S&P 500 EPS values, calculated differently from the Standard and Poor’s version. Our version sums all the companies’ earnings in the S&P 500 and divides that amount by all the outstanding shares. Our model confirms the popular S&P 500 version with a y/y growth of negative 2.03%; the difference is that we calculate our model daily as companies report.

Our outlook is unchanged from the previous update


The November Jobs report was strong at the surface, with an above-consensus gain for payroll jobs and a rise in average hourly earnings. However, both the details of the payroll report and a broader view of the labor market suggest moderation is continuing after strong gains earlier in 2022. In particular, this morning’s report showed a second consecutive monthly decline in employment as measured by the household survey and a fall in temporary workers, which often serves as a warning sign of weakness. Unemployment remained constant at 3.7%


After many months of upside surprises, hot inflation is finally beginning to cool down. The October CPI report showed a picture of receding inflation pressures across various sectors of the economy. Headline CPI rose 0.4% m/m, and core CPI rose 0.3% m/m, translating to annual rates of 7.8% y/y and 6.3% y/y, respectively. While energy prices bounced, it was offseted by lower utility prices. Food inflation improved, with strength primarily coming from “food away from home.” Notably, prices for core goods and services ex-shelter are showing promising deceleration. As wages continue to cool and pent-up demand for services softens, we expect services inflation will continue to moderate but at a slower rate than expected because of the excess demand in job openings.

Stick CPI, excluding food and energy, shows a slight change in the trend to the upside. But with year-over-year growth at 6.35%, the Federal Reserve has some work to do.

Our outlook is unchanged from the previous update


Persistent inflationary pressures have pushed the Fed to accelerate its rate-hiking trajectory. At its November meeting, the FOMC announced another 0.75% increase in the federal funds rate to a range of 3.75%-4.00%. The committee’s tone remained hawkish and inflation vigilant. Still, investors took initial relief at the new statement language acknowledging the significant tightening the Fed has already delivered and the lags with which it will affect the economy and inflation. However, Chairman Jerome Powell’s rhetoric in the subsequent press conference was increasingly hawkish, suggesting that the risk of Fed overtightening remains.

Our outlook is unchanged from the previous update


  • Fed could push the economy into recession if it overtightens policy in response to supply-driven inflation.

  • Heightened geopolitical tensions with Russia could result in continued energy shortages, low consumer confidence, and dampened growth.

  • Markets may remain depressed and volatile until investors receive clarity on inflation and the Fed.

Our outlook is unchanged from the previous update

Investment Themes

  • As the rate hiking cycle is slowly ending, with the monetary policy cycle close to its max restrictive zone, fixed income is starting to show signs of life. The yield curve inversion of 10-year treasuries, less 2-year treasuries, suggests that rates should soon fall on the long end of the yield curve. Thus, high-quality fixed income with longer duration is starting to look attractive. Fixed income with low exposure to credit risk offers more protection against market correction or economic downturn.

  • U.S. Equities are now under pressure as forward earning expectations are likely to lower for the 2023 earnings season as we approach the upcoming recession. The bear market that started in early 2022 will continue through 2023 until the economic and profit cycles reverse.

Our outlook is unchanged from the previous week update

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