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Markets looking for the next catalyst might latch on to worries about 2023

Markets could be volatile and in search of a catalyst in the week ahead, as investors consider year-end trades in the lull before the Federal Reserve’s December 13-14 policy meeting. Stocks were higher in the past week, with the year’s worst performing sectors, communications services and consumer discretionary companies, leading the gains. The S & P 500 ended at 4,071, up 1.1% for the week. “We’re in the Fed quiet period,” said Michael Arone, chief investment strategist at State Street Global Advisors. “We’re in between earnings seasons. I think the things that are going to drive the market action will be geopolitical as well as the headline economic data.” November’s robust employment report Friday weighed on stocks and lifted Treasury yields, as investors worried the central bank may raise interest rates higher and keep them there for longer. There were 263,000 jobs added in November, but the markets reacted more to the 0.6% jump in average hourly wages, which was double expectations. “In terms of economic data, investors have Goldilocks on their holiday list,” said Arone. “They’re looking for data that’s not too hot, that would keep the Fed from raising rates, and not so cold as to suggest the economy is heading into a recession.” In the coming week, there are November ISM services data Monday, and the November producer price index and December consumer sentiment on Friday. There are just a few earnings, including Costco and Lululemon Athletica , both on Thursday. On the political front, Arone said investors will be watching the Senate runoff election on Dec. 6 in Georgia . Incumbent Sen. Raphael Warnock is defending his seat against the Republican, retired football player Herschel Walker. The outcome won’t change the balance of power in the Senate because, even if Walker wins, each party would have 50 senators. In that case, Vice President Kamala Harris would cast a deciding vote in the event of a tie. “I don’t think it will have big impact. Once it’s done, there’s this view that the lame duck session of Congress could potentially get some things done in terms of spending,” Arone said. “I think that’ll become the focus and the risk here for the market is if they’re not able to negotiate these things in the lame duck session.” The European Union’s ban on Russian seaborne oil takes affect Dec. 5 and that, and Sunday’s meeting of OPEC+, puts the focus on crude prices in the coming week. China will also remain a focus, after protests broke out in the past week over Covid-19 restrictions. The market could react to “any headlines out of China, certainly Ukraine-Russia. Russia is enflaming tensions again,” said Arone. “My point is, next week that will likely influence market action more because earnings and the Fed are much more dormant.” Year-end rally? Hopes were high for a year-end Santa Claus rally in stocks, but strategists say it may be a toss-up now, depending on the next major inflation report, the November consumer price index that’s due on Dec. 13, and the Fed meeting wrapping up the next day. Strategists have already been releasing their 2023 outlooks, and many expect a rough first half, possibly including a stock market retest of the October lows, as the Fed continues to raise rates, forcing the economy to weaken. By the second half, improvement is expected in the market and the central bank is expected to be on hold. Lori Calvasina, head of U.S. equity strategy at RBC, said the market may already be trading that view. “Whatever everyone is talking about for the following year, you start reacting to in December,” she said. As a result, investor focus will be heavily on economic news. “On the one hand, I think equity investors would like to see some evidence of economic resilience, but they don’t want to see too much of it. They want to see the Fed back off,” Calvasina said. “That shows we’re still anchored to the Fed, and the sort of intermediate Fed path is still one of the biggest drivers of the market right now.” Calvasina has a 2023 target of 4,100 on the S & P 500, not far from its current level. She said investors need to be selective, and while tech has some interesting places to invest, it’s not all good at this point. “I like classic tech,” she said. “I like the big mega cap software, the semis, the hardware names. It’s all the companies that help other companies muddle through difficult environments. They’re going to have their issues. They’re going to take their licks … but longer term, there’s still a lot of appeal.” Calvasina also recommends energy and some names in industrials, but her favorite area now is small caps, which she expects to see outperform. Week ahead calendar Monday Earnings: Sumo Logic , Gitlab 9:45 a.m. Services PMI 10:00 a.m. ISM services 10:00 a.m. Factory orders Tuesday Earnings: Autozone, Signet Jewelers, Dave and Buster’s, Stitch Fix, Smith and Wesson, Casey’s General Stores , Toll Brothers 8:30 a.m. International trade Wednesday Earnings: Brown-Forman, Campbell Soup , United Natural Foods, Thor Industries, John Wiley, Vera Bradley, Rent the Runway, GameStop , C3.ai, Verint Systems 8:30 a.m. Productivity and costs 3:00 p.m. Consumer credit Thursday Earnings: Lululemon Athletica, Express, Broadcom, Costco Wholesale, Cooper Cos., Chewy, Hovnanian , Ciena, Vail Resorts, DocuSign 8:30 a.m. Initial jobless claims 10:00 a.m. Quarterly services survey Friday 8:30 a.m. PPI 10:00 a.m. Consumer sentiment 10:00 a.m. Wholesale trade

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