The last full week of trading in 2022 is here. The markets are closed next Monday, December 26th.

I don’t need to recap what has been a challenging year of trading that has been dominated by headlines made by the Fed. Most of the time I ignore the news, but it was nearly impossible to do this year.

Last week fell apart after the hawkish Fed reinforced what they’ve been saying all along – more rate hikes are coming. But the market seemed to be surprised and the selling started up once again.

So where does that leave us for the new year? What are some of the top trends to watch for in 2023?

Employment
Despite the headlines about layoffs in the tech industry, the overall job market has remained resilient. The 4-week average on jobless claims will climb from here and I think we eventually creep to 4% unemployment.

However, I think the job-related story in 2023 will be about returning to normal. What does that mean? We don’t know, and that’s the issue.

We are far from returning to anything we had pre-pandemic and there’s still a divide between management and employees when it comes to working from home. Will we or won’t we return to the office? The job market is trying to find its new identity in a post-pandemic environment.

More employees have decided to reevaluate what is important to them and that has created the ‘quiet quitting’ movement, where employees are refusing to go above and beyond iwthout pay. Wait, workers are demanding to only do what they get paid to do and this has become a movement? On the opposite side, you have Elon Musk and the very public drama of laying off workers who won’t work 80 hours a week or don’t want to sleep in the office.

The indecision and arguments between workers, executives, and owners will drag on employment until this is resolved or a new trend emerges.

Inflation Turns Into To Stagflation
I’ve mentioned how inflation numbers can show they are decrease while the underlying prices remain elevated. We will see inflation come down and the headlines will be positive and may even say, ‘mission accomplished,’, but the true story is that inflation will turn into stagflation. Eggs will still be expensive. Seriously, what’s up with the cost of eggs?

Stagflation will shift the tradeoff line between Inflation and Unemployment to the right, meaning, even if inflation comes down to 4% next year, stagflation will bring unemployment to 4%.

Geopolitics
The humanitarian effects of Russia’s war on Ukraine will linger. The threat of a nuclear war doesn’t help. The war is taking a toll as the loss of life climbs and a country is being disrupted. All of it is weighing on the global markets.

Commodities and shipping will continue to be in focus and will depend on relations between China, Russia, and the U.S. The tech war between the U.S. and China is opening an opportunity for some companies and helping bring jobs back to the States, but a trade war will weigh heavily on the markets.

Unless common sense prevails, I think 2023 is going to be the year where we muddle through the markets.

BlackRock’s global risk indicator aims to capture market attention to geopolitical risks and hit a high in the fall of 2022.

Keys to Success
Bottom-fishing for stocks and efficiently using different options strategies to reduce time and capital in the markets will be required since quantitative tightening will continue to reduce liquidity in the markets. I will focus on these types of strategies and stories in the new year.

Now, let’s get you set up for the week ahead.

Here are the reports you need to know about this week.

Tuesday – 8:30 am EST – Housing Starts and Permits – Residential construction is set to show a decline down from 1.425 million starts to 1.40 million starts.

Wednesday – 10 am EST – Consumer Confidence – Expectations see this index edging higher from 100.2 to 101 this month. The news that inflation is going down is the major driver.

Wednesday – 10 am EST – Existing Home Sales – Home sales are expected to fall again from 4.43 million to 4.20 million. Part of the issue is the mortgage rates making it cost prohibitive for some to look for a home.

Thursday – 8:30 am EST – GDP – This is the third estimate of the third quarter. Being the third estimate to come in, the data isn’t expected to move from the last estimate. The market is predicting a 2.9% GDP number, which is the same as the previous estimate.

Thursday – 8:30 am EST – Jobless Claims – With the end of the year approaching and companies trying to get their books straight for the new year, it’s not surprising to see jobless claims head higher for the next couple of weeks. Expect to see around 225k this week, up from 211k. That would bring the 4-week moving average up to 227.25k.

Friday – 8:30 am EST – Durable Goods – New orders are expected to fall -0.7% vs the 1.1% rise in October.

Friday – 8:30 am EST – Personal Income and Outlays – The PCE number is the Fed’s preferred index to measure inflation. Expect to see a month-over-month gain of 0.2%. The core year-over-year number is supposed to drop from 5.0% last month to 4.6% this month. Everyone is expecting to see these numbers head lower, but we have seen some higher-than-expected readings in other inflation reports.

Friday – 10:00 am EST – New Home Sales – I’ve added this, but the market will be moved more by the PCE number that comes out earlier in the day. New home sales are expected to drop from 632k to 600k.

With the news out of the way, I’ll be back tomorrow, looking for trade ideas to share.

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