Month In Review: January 2023

With January 2023 in the rearview mirror, the S&P 500 finished the month up 6.29%, and the Dow Jones Industrial Average up 2.83%. 

January rallies, on their own, are generally a good sign for the rest of the year. When the S&P 500 posts a gain for the month, it rises another 8.6%, on average, for the rest of the year, figures dating back to 1929 show, according to Ned Davis Research.

Also, on January 23rd, in China, they rang in the Year of the Rabbit. More specifically, the year of the Water Rabbit. As the story goes, the Water Rabbit is often characterized as gentle, amicable, and ready to adjust to different situations but with a “weak mindset and principles.” In addition, the rabbit is associated with vigilance, cautiousness, agility, and self-protection.

While nothing about the Chinese Zodiac is based in reality after last year’s market action, the idea of a gentle and amicable year sounds lovely, doesn’t it? That said, as the facts begin to line up, we’re cautiously optimistic that this year’s market action might live up to its Water-Rabbit ways, but the real test for this year will be whether inflation is truly tamed and on the retreat. 

Inflation Update

At the latest Federal Reserve meeting, the decision was made to raise rates by another 25 basis points. Chairman Powell said it’s too early to tell. Still, we’ll likely see more rate hikes, albeit smaller ones, and while they do believe there’s “more work to be done,” he also said Fed officials are encouraged to see inflation abating in such a way that they do believe we are on the right track, and in the driver’s seat. The consensus is that we’ll continue to see inflation abate throughout the year. 

One area that could hamper inflation’s retreat is that job growth remained robust for January, which has been a sticking point for inflation remaining stubbornly elevated. The numbers show the job market remains remarkably stable, although we know layoffs are continuing to make their way through the economy. This is the dot everyone will be watching closely when tomorrow’s Consumer Price Index is released.

State Of The Markets

The S&P 500 fell 19.4% in 2022, its fourth-worst decline since its inception in 1957; elsewhere, the Aggregate Bond Index recorded its worst year ever. However, with this most recent buying bout, there’s now broad strength on a technical level. More precisely, we’ve not seen this much technical strength globally since the middle of 2021. 

As a result, after last year’s hard reset, we’re seeing yields at some of the best levels they’ve seen in over a decade in parts of the bond market. Meanwhile, while the equity market is indeed still historically expensive, and it would be highly unusual for the market to be valued at this level through a recession, we’re not sure that the depth and length of the recession will be as bad as many thought, and we were concerned about ourselves. We’re also not alone in our assessment. The International Monetary Fund projected this week that the U.S. economy would slow this year. The jobless rate would rise, but there was “a narrow path that allows the U.S. economy to escape a recession altogether or, if it has a recession, the recession would be relatively shallow,” according to the organization’s chief economist.

When we look at the present landscape, we acknowledge that real estate, a large swath of the economy, cannot continue to languish, but we’re not sure it will. The average rate on a 30-year fixed-rate mortgage fell to 6.09 percent this week, the lowest in five months, bringing buyers back into the market. 

From the New York Times: 

“Home sales are probably bottoming out now or will in the first quarter this year,” said Lawrence Yun, the chief economist for the National Association of Realtors. He said that the resilient economy, solid job market, and low levels of mortgage defaults are among the reasons the housing market is stabilizing, and he predicted that mortgage rates would slide to 5.5 percent by late spring or early summer. “Stability is good, especially in light of the big changes that occurred in the past three years,” he said.

The US consumer, meanwhile, is still weathering the collective storms quite well. The government reported that the U.S. economy grew at an annual rate of 2.9 percent in the fourth quarter of last year last week as Americans continued to spend despite stubbornly high inflation. 

So, while we might have a couple of good omens in our favor, and the economic data thus far seems to be offering a nice tailwind too, we’d be remiss if we didn’t repeat, we are cautiously optimistic. 

While there is still data that could negatively surprise concerning fighting inflation which could have central banks creating a recession that’s bigger than we anticipate through overtightening, the two areas where we see possible hiccups this year are Ukraine and an impasse on the US debt ceiling. 

We believe the latter will amount to nothing more than a lot of hot wind being blown by politicians, as it has in the past. Still, it is possible that as partisan as everything has become, something could go wrong, which would be pretty destructive, but that is not something we are assigning a high probability to. Elsewhere, while Putin might be losing the battle with Ukraine, we still have concerns that he will refuse to lose the war and try to “win” at any cost.  

As always, we monitor portfolios and the world around us, and as the facts change, so will our opinions.