Dow Jones, Nasdaq 100, S&P 500 Forecast: Thanksgiving Means Illiquidity, But Volatility?

Stocks Fundamental Forecast: Neutral

• Dow Jones, Nasdaq 100, S&P 500 took a few steps back last week
• Fedspeak and US retail sales underscored a hawkish central bank
• Liquidity dries up for Thanksgiving, but will volatility remain low?

Overall, Wall Street finished lower this past week as recent upside momentum since October slowed. The Dow Jones Industrial Average, which is comprised of mostly blue-chip, large-cap companies, was left unscathed. Meanwhile, the tech-heavy Nasdaq 100 fell 1.18 percent as the broader S&P 500 weakened 0.74%.

The focus for stock markets last week was mostly on Fedspeak, a couple of notable US economic data and even the UK’s government budget proposal. In terms of the former, Fed officials have been stressing that despite a slowdown in the pace of tightening, further hikes are likely necessary. St. Louis Fed President James Bullard offered notable comments, showing he wants to see rates at a minimum of 5%.

US retail sales for October also crossed the wires, and the data surprised higher. That continued hinting at resilient consumption in face of rising interest rates. All this meant that markets added back Fed interest rate hike projections for 2023. On the chart below, we are back to traders anticipating at least 50-basis point hikes next year. This likely explains the divergence between the Dow Jones and Nasdaq 100.

2023 Fed Rate Hike Bets

Chart Created in TradingView

Thanksgiving Holiday Means Illiquidity, But What About Volatility?

The trading week ahead is shortened due to the US Thanksgiving holiday. While markets will be closed just on Thursday, expect reduced trading activity both the day before and after the break. This does mean that low levels of liquidity will be with us, but does that mean low volatility? The US economic docket is light outside of the FOMC meeting minutes on Wednesday.

The details of the report might continue underscoring the need for tightening despite a slowing pace of rate hikes seen ahead. Of course, data will be a key driver, which is notably absent this coming week. That said, a glance at Atlanta Fed GDPNow estimates shows that in recent days, estimates have been slowly climbing since October.

The latest reading is for real GDP at 4.2% for the fourth quarter, which is a seasonally adjusted annual rate. If that is the case, it will continue to speak of the resilience of the economy despite surging interest rates. At the end of the day, that may keep expectations of a Fed pivot restrained. As such, it remains difficult to prescribe a bullish outlook for equities.

Atlanta Fed GDPNow Projections

--- Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

To contact Daniel, follow him on Twitter:@ddubrovskyFX