Happy Holidays — below is the quote from 2017 Berkshire Hathaway shareholder letter about market volatility:

“If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.”

1. 3Q GDP Revised to 3.2% rate — the U.S. expanded at an annual 3.2% annual rate in the third quarter, a more robust pace of growth than previously reported, new government figures show. The increase in gross domestic product, the official scorecard for the economy, initially was reported at 2.6% and updated to 2.9% last month. A bigger increase in consumer spending, mostly on services such as travel and recreation, accounted for the stronger GDP print in the third quarter.
2. US Home Sales Dropped by a Record 35% in November — Purchases dropped 35% year-over-year, according to a recent report from Redfin, marking the largest decline since the real estate brokerage started collecting data in 2012. A separate report found sales that of previously owned homes fell for a 10th-straight month in November — the longest string of declines dating back to 1999.
The Federal Reserve’s attempts to tamp down inflation this year have brought the housing market to a screeching halt, with high borrowing costs sidelining potential buyers. It’s a drastic shift from the buying frenzy early in the pandemic that prompted bidding wars and drove home values though the roof.
3. Key Inflation Gauge Cools, US Consumer Spending Misses Forecasts — the personal consumption expenditures price index excluding food and energy, which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading, rose 0.2% in November from a month earlier, Commerce Department data showed. That matched estimates, but data for the prior month were revised higher. From a year earlier, the gauge was up 4.7%, a step down from a 5% gain in October. The overall PCE price index increased 0.1% and was up 5.5% from a year ago, the lowest since October 2021 but still well above the central bank’s 2% goal. Looking ahead, the central bank is expected to continue raising interest rates into next year — to a higher level than many investors had expected — and remain restrictive for some time. As for the size of any February rate hike, Powell said the decision will be based on incoming data, and others for December to be released throughout next month.

“The worst trades are generally when people freeze and start to pray and hope rather than take some action” — Robert Mnuchin

1. CPI Report Shows U.S. Inflation Eased in November — the Labor Department on Tuesday said that its consumer-price index climbed 7.1% in November from a year ago, down sharply from 7.7% in October—building on a trend of moderating price increases since June’s 9.1% peak. Core CPI, which excludes volatile energy and food prices, rose 6% in November from a year ago, easing from a 6.3% gain in October. September’s 6.6% increase was the biggest jump since August 1982. Prices softened significantly on a month-to-month basis. The CPI increased 0.1% in November from the prior month, compared with 0.4% in October. Core CPI rose 0.2% in November, down from 0.3% in October and 0.6% in August and September. The CPI measures what consumers pay for goods and services.
The Fed has raised its benchmark interest rate this year at the fastest pace since the early 1980s to combat inflation. It is expected to announce on Wednesday a 0.5-percentage-point increase, bringing rates to a range between 4.25% and 4.5%, the highest level since December 2007.
2. Bankman-Fried Is Charged With Fraud — U.S. prosecutors on Tuesday charged FTX founder Sam Bankman-Fried with eight counts of fraud and conspiracy, in what they called a scheme to defraud his crypto exchange’s customers and his hedge fund’s lenders. The indictment, brought by the U.S. attorney’s office for the Southern District of New York, accuses him of misappropriating FTX.com customers’ deposits and using those to pay expenses and debts of Alameda Research, his crypto hedge fund. Mr. Bankman-Fried is charged as well with defrauding the U.S. and violating campaign finance rules for conspiring with others to make illegal political contributions. The SEC alleged in its lawsuit that Mr. Bankman-Fried diverted customer funds from the start of his cryptocurrency exchange to support his hedge fund, Alameda Research, and to make venture investments, real-estate purchases and political donations. The arrest charges are the latest bombshells in a case that has transfixed Wall Street and Washington. FTX, one of the largest crypto exchanges in the world, filed for bankruptcy last month after it ran out of cash and rival Binance walked away from a shotgun merger.
3. Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely — the Federal Reserve approved an interest-rate increase of 0.5 percentage point and signaled plans to keep raising rates at its next few meetings to combat high inflation. At a news conference, Fed Chair Jerome Powell suggested the central bank would strongly consider dialing down the size of rate rises to a more traditional quarter-percentage-point increment at its next meeting on Jan. 31-Feb. 1. Given how high the Fed raised rates this year, “it’s now not so important how fast we go,” Mr. Powell said. Most officials penciled in plans to raise the rate to between 5% and 5.5% next year, with the median projection implying a further 0.75 percentage point in rate rises. In September, they anticipated lifting it to around 4.6% by the end of next year.
4. Retail Sales Fall Sharply as Shoppers Feel Inflation’s Pinch — Retail sales fell more than expected in November, suggesting that while inflation has started to cool off consumers are still feeling the burden of higher prices, pointing to an inauspicious start to the holiday season.
Retail sales last month fell 0.6% to $689.4 billion, a starker decline than the 0.2% decrease economists had been expecting, according to new data from the Census Bureau. This was the biggest drop in nearly a year, which bodes poorly for retailers as they gear up for the last leg of the holiday season. Excluding autos, sales were down 0.2%, and excluding both auto and fuel sales fell 0.2%. In October, retail sales rose 1.3%.
5. S&P 50O Index Secular Bull Market Roadmap Stat from 1929 to Present — table below shows the S&P500 Index returns from 1929 to present courtesy of BofA Research. Note that currently, the S&p500 is in a Bear Market within a Secular Bull.

In addition, from 1951 to present, probability of market gain from a down year is approximately 74%. See the figures posted below.

The week ahead — Economic data from Econoday.com:

“I made my money by selling too soon & never lost money by turning a profit” Bernard Baruch

1. Fed to Weigh Higher Interest Rates Next Year While Slowing Rises This Month — Federal Reserve officials have signaled plans to raise their benchmark interest rate by 0.5 percentage point at their meeting next week, but elevated wage pressures could lead them to continue lifting it to higher levels than investors currently expect.
They have raised rates this year at the fastest pace since the early 1980s, including by 0.75 point at each of their past four meetings to combat inflation. Fed Chair Jerome Powell indicated last week that the central bank was prepared to downshift the size of rate increases at its coming meeting on Dec. 13-14. A smaller 0.5-point increase would mark a new phase of policy tightening as they calibrate how much higher to lift rates. Policy makers expect price pressures to ease meaningfully next year, but brisk wage growth or higher inflation in labor-intensive service sectors of the economy could lead more of them to support raising their benchmark rate next year above the 5% currently anticipated by investors.
2. Continuing US Jobless Claims Rise to Highest Since February — recurring applications for US unemployment benefits rose to the highest since early February, suggesting that Americans who are losing their job are having more trouble finding a new one as the labor market shows tentative signs of cooling.
Continuing claims, which include people who have already received unemployment benefits for a week or more, climbed by 62,000 to 1.7 million in the week ended Nov. 26, Labor Department data showed this week.
3. US Producer Prices Top Estimates, Supporting Fed Hikes Into 2023— the producer price index, a measure of what companies get for their products in the pipeline, increased 0.3% for the month and 7.4% from a year ago, which was the slowest 12-month pace since May 2021. Economists surveyed by Dow Jones had been looking for a 0.2% gain.
Excluding food and energy, core PPI was up 0.4%, also against a 0.2% estimate. Core PPI was up 6.2% from a year ago, compared with 6.6% in October. The hot inflation data keeps the Fed on track for another rate increase, likely a 0.5% hike that would push benchmark borrowing rates to a target range of 4.25%-4.5%. Policymakers have been pushing rates higher in an effort to quell stubborn inflation that has emerged over the past 18 months after being mostly dormant for more than a decade.

The week ahead — Economic data from Econoday.com:

“I skate to where the puck is going to be, not where it has been.” … Wayne Gretzky

1. Home Prices Drop for Third Straight Month as US Market Cools — the US housing market pulled back even more in September, with prices slipping 1.2% from a month earlier.
It was the third straight decline for the seasonally adjusted measure of prices in 20 large US cities, according to the S&P CoreLogic Case-Shiller index. The housing market suddenly started to cool this year, driven in part by higher borrowing costs as the Federal Reserve hiked its benchmark rate to tamp down inflation. The more-than-doubling of mortgage rates this year has sidelined potential buyers and slowed demand, leading sellers to list fewer properties.
2. U.S. GDP grew 2.9% in third quarter — Gross domestic product, the official scorecard for the economy, was revised up from a 2.6% rate of growth in the preliminary reading issued last month. GDP had shrunk in the first two quarters of the year. The economy is forecast to expand again in the fourth quarter running from October to December, but estimates vary from as much as 4% to less than 1%. All figures are adjusted for inflation. The main engine of the economy, consumer spending, increased at a solid 1.7% annual clip in the third quarter, the government said. Previously the increase was put at a softer 1.4%.
— Business spending was weak, however. Investment fell sharply in large structures such as office buildings and oil rigs. The housing market also slumped due to soaring interest rates.
— Corporate profits also fell 1.1% in the third quarter. Adjusted pretax earnings declined to an annualized $2.97 trillion.
3. Powell Says the Fed Is Prepared to Slow the Pace of Rate Hikes in December — Fed Chair Powell emphasized that the Fed would be focused on slower but steadier interest rate increases in the coming months, likely reaching a higher terminal, or peak, rate than had previously been expected and keeping rates elevated for some time.
“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” Powell said in a speech at the Brookings Institution. “The time for moderating the pace of rate increases may come as soon as the December meeting.” Powell’s remarks come after the Fed has already raised interest rates by 3.75 percentage points this year over the course of six meetings. In each of the last four meetings, the Fed raised rates by 75 basis points, or three-quarters of a percentage point. The goal for the central bank in slowing its pace is to get a feel for what will be an appropriate level after seeing the impact on the broader economy of this year’s rate hikes, Powell said.
4. US Inflation Indicator Rises by Less Than Forecast as Spending Increases — the personal consumption expenditures price index excluding food and energy, which Fed Chair Jerome Powell stressed this week is a more accurate measure of where inflation is heading, rose a below-forecast 0.2% in October from a month earlier, Commerce Department data showed Thursday. The overall PCE price index increased 0.3% for a third month and was up 6% from a year ago, still well above the central bank’s 2% goal.

The week ahead — Economic data from Econoday.com: