There is a lot of tough talk heading into Wednesday's release of the FOMC meeting minutes. What has the market figured in? Hard to say. The market dropped on Monday, but still remains relatively elevated and this is despite words from regional Fed presidents about keeping rates high. Keeping rates high is the name of the game till it isn't. Yesterday the Bank of Israel raised interest rates by 0.5%, the sixth rate hike in 2022, so far. 

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The street feels that the central banks have overshot and should slow down, while the bankers still fear inflation. The question on everyone's mind is will they stop in time or will 2023 bring economies to a recessionary halt.

Monday the S&P 500 closed at 3,950, down 15 points, the Dow closed at 33,700, down 45 points and the Nasdaq Composite closed at 11,025, down 121 points. In futures action currently S&P market futures are up 11 points, Dow market futures are trading up 180 points and Nasdaq 100 market futures are down 39 points. Disney (DIS) continues to be a stock to watch, climbing 6.3%, yesterday it was one of the Big Board's most actives.

Contributor Lance Roberts expects More Bearish Market Action Before The Bull Can Run.

"Following the weaker-than-expected October inflation report, stocks surged on hopes the Fed will “pivot” sooner than later. As we discussed recently, a “policy pivot” is not necessarily bullish but instead suggests more bearish market action will come first. To wit:

“Such leaves only two trajectories for monetary policy. The first option is for central banks to pause rates and allow inflation to run its course. Such would potentially lead to a softer landing in the economy but theoretically anchor inflation at higher levels. The second option, and the one chosen, is to hike rates until the economy slips into a deeper recession. Both trajectories are bad for equities. The latter is substantially riskier as it creates an economic or financial “event” with more severe outcomes.

While the U.S. economy has absorbed tighter financial conditions so far, it doesn’t mean it will continue to do so. History is pretty clear about the outcomes of higher rates, combined with a surging dollar and inflationary pressures.”

"The “monetary policy conditions index” measures the 2-year Treasury rate, which impacts short-term loans; the 10-year rate, which affects longer-term loans; inflation which impacts the consumer; and the dollar, which impacts foreign consumption. Historically, when the index has reached higher levels, it has preceded economic downturns, recessions, and bear markets.

Not surprisingly, the tighter monetary policy conditions become, the slower economic growth tends to be."

TM contributors from the Staff at JustMarkets note that The RBNZ Is Preparing To Raise The Interest Rate By 0.75%.

"New Zealand's Central Bank is preparing to raise interest rates by 75 basis points, accelerating monetary tightening to bring inflation under control. According to analysts, tomorrow, the Reserve Bank will raise the official interest rate to 4.25% from 3.5%. This will be the biggest increase since the RBNZ introduced the OCR in 1999. Stronger-than-expected inflation and a near-record-low unemployment rate are forcing the RBNZ to accelerate policy tightening.

Most Asian central banks have also begun raising rates this year to keep up with the US Federal Reserve and are signaling further rate hikes to counter rising inflation."

As if to highlight how volatile things still really are, contributor Greg Feirman gives us a brief on Best Buy a stock which one wouldn't expect to find on our current radar.

"Best Buy (BBY) reported a better-than-expected quarter this morning and the stock is currently +7% in the premarket. Note that I said “better than expected” not good. BBY comps were -10.4% – better than the “slightly more than 12.1% decline” they guided to last quarter. EPS was -34% – though the operating margin of 3.9% was better than expected."

"I’m surprised BBY isn’t seeing the weakness Target (TGT) reported last week as it is a pure consumer discretionary play. But I suspect this is only a reprieve as it’s hard to imagine that BBY is immune from the inflationary forces and economic contraction squeezing consumers. The macro forces in play will surely catch up with BBY soon enough making this a good selling opportunity if you are trapped long or want to short."

We've been posting clips about the U.S. Housing market at a fairly steady clip in this column all year. Today we close on a contrarian note brought to us by TalkMarkets contributor Bill Smead who writes about Home Builders’ Sentiment. At the head of the article Smead goes to great length to discuss the last time the housing market had fallen to dire lows, which was in 2012.

While 2022 is not 2012 for any number of reasons he is keen on home builders in ways most analysts are not. Here is some of what he has to say:

"Today, we’ve had an abrupt monetary tightening that is an effort to rein in inflation running at over 8%. This raises the possibility of a recession in 2023...

The affordability of homes, in the most populous areas of the U.S., has declined from both higher home prices and higher mortgage rates. Compared to 2021 when both prices and demand were robust, things look lousy.

So, how should we react as investors? First, today’s temporarily difficult circumstances pale in comparison to the 2012 post-housing depression. There are 41.5% more people in the key home buying age group (27-42 years old) than ten years ago...

At the price-to-earnings ratios home builders (stocks) trade for, they are more than discounting worst-case scenarios. At the bottom in the fall of 2022, they were trading for five times after-tax profits. The bear case on these stocks stopped working in recent months. As builder sentiment got worse, the stocks rose in the face of pessimism. Sir John Templeton would say we’ve passed the point of maximum pessimism. We like our position in home builders and as contrarians, we love the fact that most investors fear to tread in the industry."

Food for thought and Caveat Emptor.

Have a good Thanksgiving.

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