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Weekly talking points and key visuals from NDR strategists' insights.

A surge in payrolls and hours and a decline in the unemployment rate in January show the labor market remains tight.  Based on this report, the Fed's job is not done. Two more 25 bp rate hikes now need to be on the table. ISM Services PMI rebounds into expansion territory, driven by stronger demand.

Roughly 20 kg of lithium goes into an EV battery or for 10 million units about 200,000 metric tons. Preliminary data from the USGS estimates global lithium production (ex. U.S.) for 2022 was 130,000 metric tons. In early 2021, we noted OEMs were entering the EV market "in force" and clearly consumers have responded. We now expect rising demand to put significant pressure on critical materials like lithium.

Peaks in inflation from above 6% have been consistent with areas near major market lows. Low inflation pressures in general, have been bullish historically. While the Fed is still raising short-term rates into a debt bubble, long-term rates have come down substantially.

Models providing more confirmation for overweight global equity allocation and regional allocations. Watching Global Balanced Account Model indicators that are close to favoring stocks over bonds. Composites support positions that remain bearish on U.S. Dollar and bullish on gold.

Higher productivity and lower ULC growth rates in Q4. But the ULC trend still a headwind to lower inflation. A spike in job cut announcements, but a decline in initial jobless claims last week. The labor market is still tight. Light vehicle sales rebound in January amid some easing in prices. Factory orders increase.

Since our last quarterly update, the economic outlook has improved, on balance, among the world's largest economies. The improving outlook is led by China and Europe. Inflation appears to be peaking in most economies, suggesting a near-term end in central bank tightening.

The S&P 500 gained 6.2% in January, with sector leadership decisively risk-on during the month. FANMAG rose 11.4% in January, outperforming the S&P 500 ex-FANMAG by over 600 basis points. The sector model made five position changes at the January month-end update, resulting in an overall more aggressive stance.

Fed acknowledges inflation improvement. Powell seems unconcerned by the easing of financial conditions. Look for continued downward pressure on the Treasury/bund spread. If the Fed is going to pause and eventually reverse the course of monetary policy later this year, we better start seeing some more softness in the labor market data real soon.

ISM Manufacturing PMI falls to lowest level since 2009, excl. the pandemic. Recession risk still high. ADP payrolls growth slows. Revised data shows more weakness in small businesses. But job openings jump at yearend, as labor market is still too tight, hindering the Fed's efforts to reduce inflation. Construction spending falls. Mortgage applications pull back.

We recommend overweighting the iShares MSCI Europe Small-Cap ETF (IEUS) relative to the iShares MSCI All Country World Index ETF (ACWI). We believe IEUS/ACWI relative strength will mean revert to the mid-point of its 2008-2018 pre-pandemic trading range, representing 28% relative upside.

VIX downturn is consistent with signs of reversals from excessive pessimism. Spiking VIX followed by weakness in 2020 and 2022, VIX declined during subsequent recoveries. Strongest gains when volatility is high in a secular bull. Watch implied/realized volatility ratio and bond yield influence.

Consumer confidence unexpectedly declines due to weaker expectations, suggesting rising chance of recession. Employment cost growth slows to the least in a year, but remains elevated. Home prices fall as affordability wanes. But a housing shortage persists, indicating limited downside in prices. The Chicago Business Barometer, along with other regional surveys, remains in negative territory.

The NDR Early Cycle Composite has been outperforming in January like it typically does in a young bull market. Of the 10 components, only three were leading in Q4. The other seven have caught up in January.

Macro and Risk-On indicators continue to support a tilt to European Cyclical sectors and Risk-On factors. While there is some evidence that Cyclical sectors may be becoming relatively overbought, valuations remain supportive. The case for overweighting European Small-Cap stocks is particularly interesting.

No doubt about Wednesday's downshift in Fed policy. Fed will keep its options open regarding additional tightening. The market continues to fight the Fed, looking for sharp reversals in policy starting later this year. Focus on 2Y spreads for imminent policy reversal.

The top-level model improved, so equities now have 72% allocation. The indicators that changed signals last month whipsawed back to their previous signals. International Developed, Emerging Markets, U.S. Value, and U.S. Small Cap equities have the largest allocations.

Demand in the Texas region remains weak. But company optimism picks up.

The S&P 500 is closing in on a trifecta of positive seasonal indicators: Santa Claus, First Five Days, and January Barometer. After trifectas, the S&P 500 has risen 87% of the time by a median of 12.7%. If there was a bear in the previous year, trifecta years have seen even stronger gains in February - December.

PCE inflation pressures ease in December, supporting a downshift in Fed rate hikes to 25 bp next week. Consumer spending declines, as income growth slows, indicating softening demand. But consumer sentiment and pending home sales post some improvement. Nevertheless, our Recession Probability Model, based on state conditions, shows an elevated risk of recession.

Weekly talking points and key visuals from NDR strategists' insights.

Thematic investing is often riskier because the investment is earlier on the "s curve" before a technology is mainstream. It needs a risk-on environment that has been lacking but is showing signs of returning.

Layoffs have been concentrated in the tech sector, where job losers likely find other work quickly or don't file claims due to severance packages. The continued tightness in the labor market is also a function of weak supply. The Fed won't be happy until labor market conditions loosen further.

Real GDP up more than expected in Q4, led by inventories and consumer spending. But capex growth slowed significantly and residential investment continued to contract. CFNAI and core durable goods orders show slowing growth momentum into yearend. Initial jobless claims fell again last week, reflecting strong labor demand, and pushing off a recession call. New home sales picked up slightly amid lower mortgage rates, but continue to run below trend.

Breadth indicators reflect strengthening global advance with increased U.S. participation, FANMAG stocks supporting the market rather than weighing it down, risk-on proxies gaining strength and risk-on off proxies weakening. Sentiment indicators show room for more optimism, inversely correlating bond yields receding, and positively correlating commodities holding their own. We remain overweight equities at 65%.

Of large, liquid and unlevered funds, only UUP is long-term oversold. Conversely, most significantly overbought funds are EM, particularly China, and bond funds. Treasury funds across the curve are overbought with longer maturities significantly so. SMH is also overbought. However, overbought has not historically been a good mean-reversion signal for the fund.

Growth sectors look oversold and cheap enough to regain the leadership status lost in 2022. Growth sectors have seen their combined weight in the S&P 500 shrink by the largest amount since the dotcom bust, but capex and R&D spending has remained strong. Unlike in 2020, FANMAG is acting more risk-on, and we may add to our Growth sector allocation in the coming weeks.

Private credit has been hot. But more money chasing fewer good deals does not bode well. The beauty of investing in private assets -- values are smoother and volatility lower, resulting in better risk-adjusted returns. But you sacrifice liquidity and pay hefty fees for that privilege. With publicly traded debt now providing decent yields at discounted prices, investors should reconsider their allocations to private credit.

In this publication, we highlight themes that are close to breaking above their 2022 downtrends and/or 200-day moving average yet still have meaningful upside to their August 2022 peak. Select Hydrogen, Metaverse, FinTech, and Genomic ETFs stand out. With NDR now overweight equities in the U.S. and globally, look for us to make more cyclical, higher-beta recommendations.

ABI remains in contraction territory for a third straight month in December. It suggests weakening nonresidential construction spending growth for most of 2023. Mortgage applications rise, spurred by lower mortgage rates. Business employment dynamics show net job loss in Q2 2022.

Free cash flow/enterprise value has been the top-performing factor over time. Select companies based on cash position, shareholder yield, price momentum, trend deviation, and free cash flow/enterprise value. Favored stocks include: Exxon Mobil, Visa, AbbVie, Pfizer, Broadcom, Bristol-Myers Squibb, ConocoPhilips, Amgen, Lowe's, Lockheed Martin.

When Crowd Sentiment Poll has indicated excessive pessimism within a secular bull, S&P 500 gains have been strongest. When fund flows have indicated outflows, the market has tended to rally impressively. ETF outflows as a percentage of market cap is also a bullish contrarian sign.

Shifting 5% to stocks from cash, bringing U.S. AA to 60% stocks (5% overweight), 35% bonds (marketweight), and 5% cash (5% underweight). A key long-term breadth indicator, the percent of stocks above their 200-day moving averages, has confirmed short-term breadth thrusts. After lagging in Q4, the NDR Early Cycle Composite has caught up in January.

The S&P Global services and manufacturing U.S. Flash PMIs edged up in January, but remained in contraction territory. Renewed pickup in cost pressures likely squeezing profit margins. Richmond Fed regional activity also contracts.

Once again, traders got caught fighting the BoJ. Until inflation expectations remain sustainably above 2%, traders expecting imminent policy normalization may be disappointed. BoJ policy and Japanese yields are important for global bond markets.

The LEI falls for the 10th consecutive month in December. Broad-based weakness among its components. Economic Timing Model remains in mild recession territory. This report suggests that the risk of recession, albeit mild, in 2023 is still elevated.

The NDR Leading Indicator Model turned bullish for the first time since November 2021 and is tied for its highest reading since January 2021. The model's message is that the market is in a better position to stage a sustainable rally than the multiple failed attempts in 2022. The model is based on 10 indicators that tend to lead the S&P 500 Index.

Existing home sales fell again in December, but beat expectations. Home prices continued to moderate. Capex confidence improved slightly in January, but still in negative territory.

Weekly talking points and key visuals from NDR strategists' insights.

For the fifth time since the S&P 500 hit an all-time high on 1/3/2022, the index is flirting with its 200-day moving average from below while the VIX toys with the 20 level from above. How markets react at these thresholds will be instrumental in determining if primary trends have changed.

Productivity has been horrendous, posting its worst showing since 1974. Several explanations are offered, including early retirements and tight labor markets. Productivity is likely to improve in the next economic cycle.

Rising risk-on index components have sent risk-on/risk-off diffusion indices to positive levels. RO/RO ratio and most risk-on proxies above 50-day and 200-day moving averages. Strengthening positive correlation between ACWI and bitcoin.

Continued decline in jobless claims shows labor demand still strong, pushing off a recession call. Philly Fed manufacturing activity remains in contraction territory in January. Housing starts and permits continue to decline at yearend.

Economic rebound will happen, but there will be more pain before the economic gain is realized. Stronger consumer rebound than what we'll see in the industrial sector. China's long-term growth trajectory remains to the downside, with zero-COVID having enduring damage.

Upgrading Financials to overweight and Consumer Discretionary to marketweight. Downgrading Health Care to underweight. The sector model favors cyclical sectors over defensive sectors for the first time since November 2021. Long-term breadth confirmation and greater sector participation would add conviction to the rally's durability.

Treasury yields are breaking down across most of the curve on building recessionary evidence. Softer labor markets and/or a change in tone from the Fed are needed to sustain the breakdown. Several indicators casting doubt on the durability of the decline.

Labor market, Fed policy, and liquidity indicators are negative toward stocks. More economic growth indicators are approaching levels where bad news has been good news for stocks historically. Inflation indicators have rolled over; will the Fed listen?

Retail sales and industrial production fell more than expected in December. Producer price inflation eased significantly. Our Inflation Timing Model dropped to lowest level since 2011, indicating continued decline in price pressures. Builder confidence picked up in January, amid lower mortgage rates. Mortgage applications jumped. Business I/S ratio up, indicating improving supply/demand balance.

A shift from large to small business hiring at yearend kept unemployment low and helped ease average hourly earnings growth. But a decline in hiring plans implies fewer job openings in the next few months. This suggests recession is still more likely than not in 2023, although the Fed may stop tightening in Q1.

Investing in GBTC should be seen as a very high risk-reward proposition. We see 100% upside but also 33% downside. Risks include the possibility that Bitcoin winter is not over, that GBTC's parent company does not act in the best interest of shareholders due to their own financial trouble, and that GBTC's discount to NAV grows larger.

Stock market optimism rising from pessimism extreme but not excessive. Similar bond sentiment as stocks and bonds have moved together. Opposite gold and dollar trend signals and sentiment extremes.

Tepid investor enthusiasm for equities as flows slow to a trickle this year and SPY nears a 52-week low vs. ACWI. The Euro Stoxx 50 ETF and Global Metals and Mining Producers broke out to new highs vs. ACWI (FEZ, PICK). U.S. Tech and the ACWI remain highly correlated and Long-term U.S. Treasurys and High Yield correlation rises to a decade high (XLK, ACWI, TLT, JNK).

Empire manufacturing index falls to lowest level in this cycle, indicating contraction in the region.

We highlight our new Europe overbought/oversold (OBOS) reports. We find extremes in the RSI have provided effective contrarian signals for price indices post-GFC across sectors, industries, countries, and factors. Extremes in z-score measures have also worked best on price indices post-GFC, with the 36-month z-score most effective.

Two breadth thrust indicators fired last week. Outside FANMAG-influenced benchmarks, most indices have spent very little time below their June 2022 lows. The S&P 500 has rallied to its 200-day moving average, where rallies stalled in August and November.

The CPI captures price changes for a fixed basket of goods and services through time. But some items need hedonic adjustment to capture changes in quality. Hedonic adjustments are limited to apparel, electronics, and rent. But other items could use adjustment too. If consumers perceive inflation is higher than reported, it could lead to a breakdown in inflation expectations.

Consumer sentiment up, led by improvement in personal finances and falling inflation. The year-ahead inflation expectations ease. Import prices pick up amid a weaker U.S. dollar.

Weekly talking points and key visuals from NDR strategists' insights.

Under different scenarios, the Y/Y CPI should be able to get below the Fed's 2% inflation target by the end of Q2. Then what?

Consumer credit spiked again in November, as consumers struggled to keep up with inflation. The debt service ratio is still subdued but likely headed higher, which is a downside risk for future spending growth. The pace of credit growth is approaching extreme levels, which could be bearish for equities.

Helped by lower gasoline and vehicle prices, CPI inflation fell in December. But shelter remained strong. Jobless claims indicate labor demand remains firm, which may keep upward pressure on wage growth and services inflation. Nevertheless, headline, core, and alternative core inflation measures have all peaked, which should allow the Fed to downshift to a 25 bp rate hike in February.

While the case for recession remains intact based on the indicators, it is becoming increasingly apparent that the recession will be mild. The economy could come out of its downturn as early as Q2. But energy risks, high inflation, and tighter monetary policy present downside risks.

This week the NASDAQ Composite A/D Thrust indicator moved to its highest level since September 2021 and QQQ long-term breadth improved to 58%. However, the Nasdaq 100 remains top-heavy with the top-10 stocks by market-cap making up nearly 58% of the index. For a sustainable rally, improved participation from the largest stocks will be needed.

Growth sectors finished 2022 on a sour note, and the sector model now favors Value over Growth by one of its widest margins on record. However, Growth sectors have performed better in the first two weeks of 2023. We highlight January indicator and model developments, and six position changes we are considering.

After weighing down market in 2022, FANMAG recovery would support rally prospects. Equal-weighed/cap-weighted ratio trending higher, an encouraging sign. China megacap rebound has boosted China and EM indices - FANMAG comeback could have similar impact on U.S. and ACWI.

Tumbling prices for durables, nondurables, and a modest decline in services could bring inflation back to the Fed's target. That could allow the Fed to stop raising rates after Q1. If not, the Fed risks overtightening, sending the economy into a hard landing. Even if inflation falls to 2%, we doubt it will stay there for very long.

Once again, we expect we will need to look outside of U.S. Tech themes to outperform the ACWI this year.

The percentage of stocks at 252-day and 30-day new lows have been diminishing on recent selloffs. Fewer new lows have been a sign of a tired bear market but are not enough by themselves to declare a bull is underway. We list three technical indicators to watch for bullish confirmation.

High construction backlog bodes well for CRE activity. But rising cost of capital and tighter financial conditions present risks. Mortgage application trends point to continued housing market weakness.

Asset managers and leveraged funds have removed their near-record net short positions in S&P 500 futures. Asset managers have gradually grown more bullish, but leveraged fund changes could be year-end positioning. NDR's sentiment composites suggest short-term sentiment has been relieved, but investors are far from excessively optimistic.

NFIB Index drops at yearend to second lowest level since 2013, consistent with declining economic activity. Wholesale I/S ratio climbs to pre-pandemic level amid softer demand. Excess inventory unwind expected to lead to lower price pressures.

Technical indicators remain strong at the start of 2023. Supported by an improvement in economic indicators. But downside risk remains due to central bank tightening and potential for earnings to miss expectations.

The surprising decline in AHE was encouraging for policymakers and investors. But the Fed won't overreact to any one number, and there are better compensation measures. Talk of wage/price spirals is premature with inflation expectations well anchored and lower rates of unionization. But we're not out of the woods yet, due to growing labor market imbalances and persistent structural issues.

ETI declines for a third consecutive month in December, but is not yet signaling an outright contraction in payrolls. Wholesale used vehicle prices drop at a record y/y rate, a source of downward pressure for the CPI. Consumer inflation expectations for the year ahead decline.

History strongly argues that the very long-term trend is bullish but with some current concerns. Intermediate to cyclical trend evidence argues for a continuation of the trading range over the last six months. Short-term trend looking hopeful.

Weekly talking points and key visuals from NDR strategists' insights.

In a better-than-expected jobs report, employers increased headcount, but the average workweek shortened. The unemployment rate fell to 3.5%, the lowest since 1969. Wage growth moderated, a sign that the labor market has begun to cool without a debilitating hit to payrolls at this time. This should allow the Fed to downshift the pace of rate hikes to 25 bps at the next meeting, as they feel their way to "sufficiently restrictive." ISM Services PMI falls sharply into contraction territory. Factory orders decline.

In our Outlook for 2023, we stated we expect physical asset (commodity) related themes will continue to outperform digital asset (tech) related themes into the first half of the year. Three of the top ranked themes (Natural resources, MLPs, and Miners) on our Thematic Scorecard also have the highest correlations, of all themes, with the S&P GSCI Total Return Index.

Several indicators show rents should slow later this year, as soon as Q2. New multifamily supply is coming online this year, further adding to downward pressure on rents. At a minimum, rent growth should slow to the 3% to 4% range.

ADP payrolls strengthen at yearend. Layoff trends remain subdued. Manpower hiring plans for Q1 show only a modest cooling in labor demand. Light vehicle sales decline in December. Trade deficit narrows significantly.

The global economy ended 2022 on a weak note, according to the latest global PMIs. Several indicators suggest that the global economy is on the cusp of recession. Despite contraction in China, EMs continued to outperform developed economies.

It was another rough year for thematic investing as only 25% of themes outperformed in 2022. No technology themes outperformed for the year. After two months of risk-on, December was decidedly risk-off. Technology themes did better than Global Shock and Demographic themes in December, but that was largely driven by large Chinese Tech companies.

Beware of the crowd at extremes, or Rule #7, is a foundational rule of NDR model building. But it frequently conflicts with Rule #5 or Don't fight the tape, which is used for risk management. More modern risk management tools allow clients to act on extremes and still manage risk.

The fastest inflation in 40 years forced the Fed into the most aggressive tightening cycle since 1980. Stocks, bonds, and crypto tumbled; cash - especially U.S. dollars - was king. The Russia-Ukraine war led to soaring European energy prices, but WTI ended 2022 below where it was before the invasion.

The S&P 500 capped off its dismal 2022 campaign with a 5.9% decline in December, with all sectors finishing in the red during the month. The biggest issue for Growth sectors in 2022 was the enormous performance drag from the technology-related mega-caps. The sector model now favors Value over Growth by one of its widest margins on record.

The ISM Manufacturing PMI in contraction territory for the second consecutive month in December. Price pressures decline. Job openings little changed in November. Labor market still too tight. Mortgage applications slump at yearend, pointing to continued decline in home sales into 2023.

Trends strengthening in opposite directions, consistent with inverse correlation. Gold Watch Report supports bullish gold position, technical composites support bearish dollar position. Trends driven by change in outlook for interest rates.

Sentiment leans quite bullish, but in the context of the Fab Five, only for the short-term. Put/call ratios show near-record pessimism, but look distorted - there is still plenty of pessimism. However, cyclical sentiment/valuation still shows high risks.

The top-level model weakened, so equities now have 58% allocation. Although the Baltic Dry Index indicator flipped bullish, the global PMI breadth and equity market breadth indicators turned bearish. Emerging Market bonds, U.S. Value, and International Developed equities have the largest allocations.

Both stocks and bonds fell by more than 10% for the first time on record. Value outperformed Growth by the most since 2000, led by Energy's record year versus the S&P 500. The S&P 500 posted its biggest decline since 2008, and the U.S. underperformed the ACWI by the most since 2005.

The S&P Global U.S. Manufacturing PMI in contraction territory for a second consecutive month in December. Price pressures ease. Construction spending up in November, led by the private nonresidential sector.

In the global framework, Emerging Market and U.S. indices had the biggest declines, furthest from highs. U.K. Index closest to new highs, supported by sector composition. Better performance from Tech, Consumer Discretionary and Communication Services sectors would support the U.S. Index and ACWI, in which the U.S. has most of the weight.

Markets are not ready for a normalization of the term premium. Stocks could soar if the Fed achieves a soft landing. A faster Chinese recovery could pull the rest of the world with it.

The Chicago Business Barometer, along with most other regional indexes we follow, are in contraction territory at yearend.

Despite one of the fastest and broadest global tightening cycles on record, central banks picked up their hawkish rhetoric in December. Negative real central bank rates all over the globe suggest policy remains accommodative. Unless inflation slows significantly, the tightening will continue.

We are revising several indicators in the internal (price-based) composite of the U.S. Stock Market Model. After a review, we decided to not change the external (non-price-based) composite. The changes go into effect on 1/1/2023.

Initial jobless claims picked up last week, but the level is still close to pre-pandemic, as labor demand remains strong.

Our REITs scorecard, REITs trend model, and sector model are all bearish heading into 2023. Technicals have deteriorated since April and the sector currently has the weakest long-term breadth readings. If the sector model downgrades Real Estate at month end, we will likely follow suit.

Economic weakness remains relatively broad-based across states. But our Recession Probability Model is still far from a critical level. Pending home sales keep cratering, pointing to further declines in existing home sales into 2023. Richmond Fed factory activity shows modest improvement, while services revenues decline.

The top five themes for 2022 deal in the physical rather than digital (i.e., are not technology related). Our top theme for 2022 is Infrastructure, the only theme to maintain an overweight rank all year by our Thematic Opps scorecard.

The shareholder yield strategy has strong long-term returns, outperforms during recessions, and possesses a positive factor composite score. Select companies based on cash position, shareholder yield, price momentum, trend deviation, and free cash flow/enterprise value. Favored stocks include: Exxon Mobil, Visa, Chevron, AbbVie, Bristol-Myers Squibb, Amgen, ConocoPhilips, CVS, Cigna.

S&P 500 P/E ratios are set to fall for the second year in a row. The two-year drops in operating P/Es are the biggest on record. Since earnings trail the economy, the best case for P/E expansion in 2023 would be a new bull with EPS growth delayed until 2023.

Existing home price indexes off their cycle peaks and show slower y/y growth. This should help ease inflation in 2023. Texas factory activity continued to shrink at yearend, confirming the weakness across other regions. Advance goods trade deficit narrows sharply.

After weakness before Christmas, the next five days have been stronger in all but one year. The market tends to rally before and after New Year's Day. Fourth quarter advance is consistent with historical tendencies, with seasonal influence favorable through February.

Consumer spending up less than expected in November. PCE price pressures continue to moderate, but are still far above the Fed's inflation target. Consumer sentiment picks up, amid slowing near-term inflation expectations. New home sales rise, as mortgage rates pull back. Durable goods orders decline, led by civilian aircraft.

Weekly talking points and key visuals from NDR strategists' insights.

We grant Tesla deserves a higher-than-industry multiple. However, as competition from OEMs and Chinese EV manufactures grows, we suspect we've not yet seen the low for Tesla's sales multiple.

Although headline inflation has peaked, cyclical inflation remains stubbornly high. Fed tightening should loosen labor market conditions and reduce cyclical inflation, but with a lag. If labor costs and cyclical inflation prove stickier, margin pressures could intensify.

Upgrading Emerging Markets and Pacific ex. Japan to overweight and downgrading the U.S. and Japan to underweight. Adding 3% to EM and 4% to Pacific, cutting 5% from U.S. and 2% from Japan. Responding to relative strength trends and Global Regional Allocation Model. Composites reflect contrasting trends of indicator evidence.

The LEI fell for the ninth straight month in November, the longest down stretch since the GFC, indicating a high risk of recession. Our Economic Timing Model fell further into negative territory, also consistent with an elevated recession risk. But initial jobless claims remained subdued, a sign of labor market resilience. Q3 real GDP was revised up, showing more underlying strength in the economy than previously estimated.

The BoJ surprised markets by lifting its 10-yr yield cap as broadening inflation, strong wage growth, and a resilient economy no longer constituted such dovish policy. The market impact is likely to be modest, and probably reflects the beginning of gradually tighter policy. Although Japan's long-term economic picture hasn't changed much, an unleashing of inflation expectations may lead to consistently positive price growth.

China and other EM economies have been adding to their gold reserves. China is likely disguising its purchases and holdings of Treasurys. China has been trying to increase its role in global finance.

Consensus earnings estimates appear high if there is no recession, and fanciful if there is one. Watch margin pressures since wages tend to be a lagging indicator. The NDR top-down earnings model is at a two-year low and falling.

Consumer confidence up at yearend, led by a stronger assessment of business conditions and job availability. Inflation expectations ease. But CFO optimism remains subdued in Q4. Existing home sales sink further, near lowest level since 2010. Home price growth moderates.

We ranked all Thematic ETF portfolios on YTD performance and time spent favored by our Thematic Scorecard. Today we share the bottom five of the top 10. One theme comes from the Demographic category while most we consider Global Shock themes. The list re-affirms our preference for physical asset related themes over digital themes carrying over into 2023.

Despite sanctions and price caps on Russian oil, the physical market for crude looks to be loosening more than tightening. The crude futures curve, inventory trends, and macro outlook are concerns heading into 2023. Several potential bullish offsets, along with a bullish sector model, keep us overweight for now.

Free cash flow/enterprise value has been one of the top factors over time. Choose stocks based on price momentum, trend, operating cash flow efficiency, interest coverage, and free cash flow/enterprise value. Selected stocks include: LVMH, Shell, Novo Nordisk, TotalEnergies, Equinor, Christian Dior, Essilor, AstraZeneca, BHP Group, BP, GSK, Relx, Anglo American.

The NDR Daily Trading Sentiment Composite has fallen from extreme optimism to neutral. Before every 10% rally in the S&P 500 since the 1/3/2022 bull peak, the composite fell below 20. The lack of extreme pessimism could explain why the Santa Claus rally has been lackluster so far.

Building permits fall more than expected in November, and point to further weakness in housing starts ahead.

The European sentiment composite has been in the extreme optimism zone since mid-November, suggesting near-term consolidation in European equities. But even after last week's fall in European equities, technical indicators are still positive. Watch cyclical industry relative strength and high yield spreads to gauge whether the uptrend is intact or a sustained down-leg in equities is likely.

It is premature to look for a yield breakdown, considering the continued tightening by central banks. Technicals and sentiment show market isn't ready. Falling inflation, rising unemployment, below-trend growth, and the end of the tightening cycles should eventually cause yields to move lower.

Despite likely Eurozone recession, EAFE breaking out vs. ACWI. Last week saw large fund flows to U.S. Value and Emerging Markets. Stock/bond correlation continues to climb.

Persistent decline in the HMI points to continued weakness in housing starts into 2023.

Absolute and relative strength in the China Index since October, now boosted by mega-caps. Hong Kong and Taiwan have also rallied and outperformed, with all three indices breaking above their 200-day moving averages. Pacific ex. Japan and Emerging Market indices have been the strongest in the seven-way framework, as composites indicate that the regional model will continue to call for increasing weight.

Weekly talking points and key visuals from NDR strategists' insights.

Both Flash U.S. Services and Manufacturing PMIs fall in deeper contraction territory in December. The decline in activity keeps the risk of recession elevated, going into 2023.

We like to look at highly defensive Utilities relative to highly cyclical Technology around the start of bull markets to see if the rally has a proper cyclical tilt. The current rally does not.

Normally high margins are good for earnings and stocks. But passing on price increases to support margins boosts inflation. That will cause the Fed to raise rates even more or keep rates higher for longer.

Emerging markets were identified as a potential opportunity in 2023 during our Outlook webinar. Emerging markets are historically cheap, with improving sentiment, and should benefit from a declining USD. However, the region's relative trend needs to improve to warrant a bullish outlook.

Retail sales decline more than expected, led by vehicles and housing-related categories. Industrial production also surprises on the downside. Regional factory activity contraction points to more weakness ahead. But labor demand remains strong, with initial jobless claims falling to lowest level in nearly three months. Business inventories up slightly. But retail inventories decline.

Sector leadership has been defensive since the October lows, not typical for a cyclical bear bottom. Several indicators and models have turned less favorable towards cyclical sectors in recent weeks. Given the macro outlook and indicator trends, our next allocation shift is more likely to get more defensive than cyclical.

The correlation between stock prices and bond yields is negative for the first time since 2007. Since 1998, negative correlations signaled the Fed had tightened too much. Before 1998, correlations were negative because inflation was a bigger risk than deflation.

We remain cautious on Tech Titans and technology themes heading into 2023. Historically, when Tech has a year of significant underperformance, it is followed by another year of underperformance. But weakness is not set in stone. We will be watching cloud, semiconductors, and internet advertising trends, along with our scorecard ranks, for signs Tech is starting to rebound.

Terminal range to hit 5.00% to 5.25% in 2023. Fed funds rate not yet in restrictive territory but will be early next year, allowing the Fed to transition to sustained restraint. Two more years of below-trend growth. Recession more likely with higher terminal rate.

Import prices decline more than expected in November, boosting the argument that inflation has peaked in this cycle. Architecture billings contract further, painting a negative outlook for nonresidential construction spending in 2023. Mortgage applications pick up slightly, but housing market outlook still dim.

We expect global recoveries in stocks and bonds in 2023 as inflation recedes and central banks end their tightening cycles. A risk to the outlook is increased severe global recession probability, with inflation staying higher for longer. Expect yield curve steepening, narrowing spreads, emerging market bond and equity recoveries, dollar weakness, gold strength, and improvement in Technology stock performance and U.S. relative strength.

Households were overweight in stocks at the market low on September 30. Later surveys confirm that the public is "overbought" stocks. Institutions and foreigners are also overweight stocks.

Consumer prices rise less than expected in November. Core CPI ex-shelter declines for the second straight month. This report supports a 50 bp Fed rate hike tomorrow and a further downshift in 2023. NFIB small business optimism little changed. But y/y decline is consistent with a weakening economy. Freight volume near flat and facing headwinds.

The majority of NDR Early Cycle Composite components are down since the October lows. Some traditional early cycle sectors have been outperforming. Defensive SHUT sector strength is inconsistent with early bull market leadership.

Weekly talking points and key visuals from NDR strategists' insights.

Slowest PPI inflation since mid-2021. Intermediate price pressures ease across the production flow. Consumer sentiment up slightly. Near-term inflation expectations come down to lowest in 15 months. Housing affordability sinks in October to a new low since 1985. Wholesale inventories rise less than expected.

Upgrading gold from neutral to bullish. Gold trend improving, consistent with worsening U.S. dollar trend. Bullish signal from aggregate of indicators in Gold Watch Report. Gold now stands to benefit from seasonality and declining bond yields, both in real and nominal terms.

Uncertainty surrounding inflation, the strength of the economy, and Fed policy will likely determine how much of 2023's thematic return distribution looks like 2022 vs. a return to pre-Covid "normalcy."

The Inflation Timing Model is bullish for stocks and bonds, and both seem to be responding to that. Stock earnings yields are bearish for stocks versus interest rates, and a recession could really hurt earnings yields. Our Economic Timing Model is consistent with an upcoming recession, and Fed Policy, while not as hostile, is still unfavorable.

Despite a pickup in initial and continuing jobless claims, levels suggest that labor demand is still solid.

November was another risk-on month and 30 of 51 themes outperformed SPY, led by green themes. While the positive returns are welcomed, extreme volatility is making it hard to not get stopped out on trades. We believe our new Thematic Opportunities Scorecard will help us navigate the difficult environment.

Downgrading Japan to marketweight from overweight. Closing out Chinese bond trade. Defensive positioning no longer warranted in DM debt. Policy changes prompt downgrade of Chinese bonds.

Shifting 5% to stocks from cash in response to model changes, bringing U.S. recommendation to marketweight stocks, bonds, and cash. We remain below our U.S. asset allocation model's equity weight on lack of long-term breadth confirmation and macro concerns. If concerns shift from inflation to recession, look for allocation into bonds, and then into stocks as the economy recovers.

Q3 nonfarm productivity revised up, but nonfinancial productivity slumps. ULC keeps inflation pressures hot. Used vehicle prices keep falling, a source of lower CPI inflation.

Valuations are rising again, as earnings growth slows and the market has rallied. Short-term sentiment is excessively optimistic, while more intermediate-term sentiment remains more pessimistic. Margin debt is declining, but more is likely needed to signal extreme pessimism.

Tighter financing conditions and the prospect of an economic downturn are weighing on CRE performance and sentiment. Although real estate has outperformed financial assets this year, bonds and cash are more competitive now. Asset allocators may want to consider rebalancing portfolios in the coming months.

November strength was broad based, with all sectors posting positive returns. Leadership trends were mixed, with Materials, Industrials, and Communication Services finishing as the top performers, and Energy, Consumer Discretionary, and Health Care finishing as the worst. More long-term breadth improvement will be needed to suggest the market's rally can continue deep into 2023.

Wider trade deficit points to a much smaller contribution to GDP growth from net exports in Q4 than in Q3. CEO optimism continued to recede at yearend.

The global economy contracted for a fourth straight month, according to the latest global PMIs, with many indicators at or near global recession levels. The economic weakness has broadened across sectors and regions. Global price pressures and supply chain issues continued to ease.

Macro headwinds in 2022 should become tailwinds during 2023, with high recession risks complicating timing. Our year-end targets are 4300 on the S&P 500, below 3% yield for T-notes, -0.5% to 0.5% GDP growth, and 3.0% to 3.5% inflation. Allocation ideas include the return of the 60/40 portfolio, transition back to cyclical sectors, and physical over digital themes.

The ISM and the S&P Global Services PMIs diverge by the most on record. The average of the two still points to continued but slower growth in services than earlier in this cycle. Employment trends weaken. Light vehicle sales decline. But factory orders rise more than expected.