February Market Perspective
It’s been a solid start to the 2023 year, with the markets continuing to accelerate throughout January with positivemovement on the struggle against inflation and other solid economic reports. The US equity markets all closed higher for the month with the Dow Jones Industrial average up 2.93%, the S&P 500 up 6.28% and the tech heavy Nasdaq performing the best of the major indices, up 10.68%. US corporate earnings were reported throughout January with 70% of S&P 500 companies beating analysts’ expectations.
Foreign equities also performed well in January with developed foreign markets up 8.90% as measured by the MSCI EAFE and emerging markets gained 7.90%. This year, the outlook for developed foreign stocks has been encouraging and to our equity heavy portfolios, we recently added an allocation to a broad foreign exchange traded fund, a Europe focused fund and a small/mid capitalization foreign fund. Global equity markets have outperformed the S&P 500 since mid-October. More attractive valuations and a milder than expected winter has so far helped Europe avoid an energy crisis and push performance.
The US bond market has shown improving signs with the Bloomberg US Aggregate up 3.08%. History has shown a reversal for poor performance in the bond market tends to happen in the previous six months of the Federal Reserve reversing monetary tightening and the first six months after. For this reason, we have shifted the more conservative portfolios to add some duration (a bonds sensitivity to changes in interest rates) back to take advantage of this opportunity.
The highly anticipated Consumer Price Index was released January 12 by the Bureau of Labor Statistics. The report showed the year-over-year rate of inflation slowed 0.1% for December at 6.5%, down from the 7.1% reading for November. Core inflation, which eliminates food and energy, was reported at 5.7%. While the inflation reading is still well above the Federal Reserve’s 2% target, we are starting to see improvement from the highs of last year.
Fourth quarter 2022 US Gross Domestic Product was reported January 26 indicating that goods and services grew at a 2.9% annualized rate, beating 2.8% estimates, though lower than the third quarter reading of 3.2%. Despite the strong economic reports, many economists are still forecasting for a shallow recession in 2023. However, with theunemployment rate at 3.4% and the labor participation rate improving slightly at 62.4%, a case can be made for the likelihood of the Federal Reserve accomplishing their goal of a “soft landing” and avoiding a recession.
We ended the month of January with the Federal Open Market Committee holding its first meeting for 2023 on January 31 and February 1. Investors were expecting and received a 0.25% interest rate increase taking the target range to 4.5% - 4.75%. This was the smallest rate hike since March of last year. Federal Reserve Chairman Jerome Powell stated, “Inflation data received over the past three months show a welcome reduction in the monthly pace of increase.” He continued, “while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”
A potential headwind for US markets is that as of January 19 the US debt ceiling was in focus again after reaching the limit and forcing “extraordinary measures” to be taken. Janet Yellen sent a letter to Congress urging them to take immediate action and conveying that payments to the Civil Service Retirement and Disability fund and the Postal Service Retiree Health Benefits fund would be suspended. According to Yellen, these measures would sustain the debt until June.
We have seen a surge of enthusiasm from investors with anticipation of what the Fed is going to do only to have those short rallies fizzle. However, if we look back to history when the market is up in January, 85% of the time the average remaining 11 months of the year gain about 11.5%, according to Sam Stovall, Chief Investment Strategist at CFRA Research. He went on to say that when the previous year is negative there is historically a higher bounce and the markets average 14%.
The recent data and momentum in the equity and bond markets have been an encouraging sign that the worst of the declines are moderating. With this cautious optimism we made some portfolio changes to remove the alternatives, add duration to the fixed income allocations and, as mentioned, increased our foreign allocations. We are monitoring the progress of the portfolios and continue to adjust the portfolios to take advantage of opportunities.