One group of stocks is refusing to buckle even with a recession looming

Published Wed, Dec 7 20221:01 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Stocks remain on edge after stumbling out of a seven-week rally trend, undoing the entire "Powell pop" from last Wednesday and fixating on the furious rally in Treasurys — which is reinforcing a now-common view that the economy will struggle in 2023. The rally off the Oct. 13 bear-market low never quite reached escape velocity, halted exactly at the downtrend line from the Jan. 3 high, "risk-on" sectors have not decisively led, and a good portion of the pessimistic extremes in sentiment and positioning have likely been burned off. All that said, the setback hasn't quite negated the post-October rebound, with the S & P 500 sitting right at the 100-day average and the mid-point of the post-April index range. Also worth noting that both October and November were weak early in the month and finished strong, and a dose of welcome news on labor costs this morning did not escape the market's notice. The deeply inverted Treasury yield curve is at a significantly lower absolute yield level than the recent highs is signaling to investors that the Fed is at high risk of overtightening the economy into a downturn. But it also means inflation is likely on a comforting path. This is an odd cycle, the starting point of any downturn unusually strong (3.5% unemployment, staggering level of goods demand at the peak) and with consumer/corporate balance sheets in pretty good shape. Bank of America here plots what has historically happened in the year before and after the Fed's final rate hike. The average (a 14% 12-month gain) covers 13 such halts. The best return came after the 1980 halt, and the worst in 1969 right ahead of a recession with still-high inflation (5-6% CPI). There's a wide range of outcomes, but it also must be said the stock market this time has been unusually weak since before the tightening began and forecasts for recession are far more widespread and confident than in the usual cycle. Have we front-loaded more pain than usual? A longer-term look at the equal-weighted consumer discretionary vs. energy stocks shows some convergence here as the consumer has refused to buckle, car production is in catch-up mode and even homebuilder stocks are 25% off their lows, with energy in consolidation mode. A breakdown in crude oil even with a weaker dollar contributes to the disinflationary slowdown feel of the markets, but it's also a nice offset to consumer stress as it arises. Energy stocks faltering but still holding longer-term uptrends for now. Market breadth is noncommittal Wednesday. Credit markets have held up reasonably well. VIX is contained under 23, up from the lows near 19, taking cues from the tape which for the moment remains in the "acceptable" range, the S & P barely holding above late-October highs which were also the mid-November lows.