Why This Could Be the Most Important Week for the Stock Market in 2023

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To put it mildly, it’s been a roller-coaster year for the equities market so far. Geopolitical conflict, the looming debt-ceiling crisis and the frantic rotation into the “Magnificent Seven” have given stock traders plenty of fodder. Yet, the most turbulent week may be upon us right now.

After all, there’s more to the financial markets than a handful of high-flying technology stocks. If the strength of the consumer is what’s propped up the fragile economy in 2023, then that strength is about to be tested. Indeed, stock investors should watch closely this week as a slew of data points could set the tone for the end of this year and even 2024.

All eyes on CPI

Speaking to the International Monetary Fund (IMF) last week, Federal Reserve Chairman Jerome Powell made the central bank’s primary objective crystal clear.

“The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time,” he declared.

Thus, the Fed’s 2% inflation target is evidently here to stay. Unfortunately, Powell followed up that statement with, “[W]e are not confident that we have achieved such a stance.”

In case anybody didn’t catch his drift, Powell reiterated that “the process of getting inflation sustainably down to 2% has a long way to go,” and, “We will keep at this until we succeed.” Those statements should dampen the optimism of anyone operating under the assumption that the Fed will cut interest rates this year.

Still, the market seems to believe that interest-rate cuts are in the cards for the first half of 2024. This would help to explain why the major stock-market indexes flew higher over the past couple of weeks.

However, the market may have gotten ahead of itself. The Consumer Price Index (CPI) report for October is set to be released on Tuesday, and a higher-than-expected reading could prompt Powell to make good on his “keep at this until we succeed” promise.

Are people too optimistic?

Unfortunately, there’s a setup for a potential letdown here. In September, the CPI increased 3.7% year over year and 0.3% month over month. For October, economists expect to see improvement with the CPI only rising 3.3% year over year and 0.1% month over month.

Hence, the market has already priced in the assumption of disinflation. Assumptions are a dangerous force in the financial markets, so investors should prepare for negative surprises and wobbly share-price moves.

After that, Wednesday will bring October’s Producer Price Index (PPI) and Empire State manufacturing prints. Then it’s the October initial jobless claims reading on Thursday. This is an action-packed week, but all that action could mean volatility for complacent stock investors.

Overall, it’s the sense of complacency that could pop any bubbles and ruin investors’ holiday season. For example, the optimism is unmistakable in the disinflation assumption of Neil Dutta, head of economics at Renaissance Macro Research.

“I would not be surprised to see a negative CPI inflation print for October,” Dutta predicted.

Thierry Wizman, Macquarie’s global FX and interest rate strategist, served up a similarly sanguine forecast.

October’s CPI reading is “likely to have a calming effect on markets,” Wizman asserted.

How strong is the consumer, really?

Despite “sticky” inflation, Americans continue to shop til they drop. At the very least, that supports the ongoing assumption of equities-market bulls, but this week’s earnings data could refuse the resilient-consumer notion.

Think about the goods that most people would consider necessities. Where do they regularly shop to get those necessities? The most obvious answers would be big-box retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT). You could also add BJ’s Wholesale Club (NYSE:BJ) to that list and, to a lesser extent, Home Depot (NYSE:HD).

Since the holidays are coming up, buying gifts might also be considered socially necessary. Therefore, a truly resilient consumer can be expected to shop at such retail chains as Macy’s (NYSE:M), Ross (NASDAQ:ROST), the Gap (NYSE:GPS), and TJ Maxx and Marshalls, which are owned by TJX Companies (NYSE:TJX).

All of these big-box retailers are set to report their quarterly earnings results this week. Among them, the most closely watched quarterly releases will undoubtedly come from Walmart, Target and Home Depot.

Thus, just because the “Magnificent Seven” technology companies have already reported their earnings results, this doesn’t mean the market is out of the woods yet. Between the CPI report and the major retail earnings, 2023 still has to run its last mile, and the potential for a few stunners — either positive, negative or both — is right in front of us right now.