What a difference a year makes. Last year stocks were down 20% for the year after starting the year near market all-time highs. This January the market moved higher but with a fear of a major downturn in 2023 earnings. The DOW finished the month +2.8%, The S&P500 +6.2% and the NASDAQ recovered markedly +10.7%. The rally was a good start to the new year.
The bond market has been supportive of yields. The short-end of the market, 6-month yields, have prospered in the 4%+ area and 2-year notes are in the 4.20% range. The 10-year is in the 3% area. The Dollar has pulled back in price, supporting U.S. companies with overseas business.
S&P500: Jan +6.18% DOW: Jan +2.83%
NASDAQ: Jan +10.68% Russell 2000: Jan +9.69%
Germany is picking up economic levels as is the UK. Global support is starting to work with China’s reopening. In short, the message circulating is that a light recession may well take shape. The International Monetary Fund mentioned this week that it sees a turning point for the global economy. They are raising their growth outlook to 2.9%. While it is lower than the 3% recorded in 2022, the IMF expects growth will bottom out this year and work above core inflation and remain above pre-pandemic returns even in 2024.
The Fed on Wednesday indicated progress is developing on the inflation front, suggesting lower rates are surfacing. The markets warmed to the message and extended the current rally. The Fed suggested two smaller 25-point rate hikes that are likely to bring the end of advancing rates. This will be a positive step for markets.
We will no longer have to fight the Fed, but challenges remain. The Fed will likely keep rates in restrictive territory and for longer than necessary. The rally will adjust to news and develop related volatility. The economy and financials will have to adjust to short-term rates around the 5% level. Surveys indicate that activity has slowed in the Industrial sector, but not yet confirmed by corporate guidance. The Fed’s administered pain is almost behind us and markets will progress to higher stock prices throughout the year.
The U.S. consumer has remained resilient. Earnings in January, for the last quarter, were checkered with the important FAANG stocks showing signs of some weakness. On balance, the economy passed the earnings test. The consumer, which represents close to 70% of the U.S. economy, has so far shown tolerable weakness. The Fed gets good grades in the effort to bring inflation under control.
As 2023 works through, the full effect of earlier Fed policy moves should start to take hold.
The markets have been tuned to rallies and tend to mount three or four bursts per year. The Fed is coming to the end of the cycle but rallies tend to be pressured by headline events which promote direction of stock prices. We still maintain a cautious stance for clients. We expect the inflation issue will be worked through this year and expect a bull market to take hold in 2023.