Hello all - we hope you had a nice start to 2023.
The markets kicked off the year with solid gains. For January, the Dow gained 2.8%, the S&P 500 rose 6.3%, and the Nasdaq, which has a higher concentration of tech stocks, was up 11%. For the Nasdaq, that was the best start to a year since 2001 (unfortunately, shortly thereafter the tech bubble burst and the Nasdaq fell by more than 50% that year!).
The markets kicked off the year with solid gains. For January, the Dow gained 2.8%, the S&P 500 rose 6.3%, and the Nasdaq, which has a higher concentration of tech stocks, was up 11%. For the Nasdaq, that was the best start to a year since 2001 (unfortunately, shortly thereafter the tech bubble burst and the Nasdaq fell by more than 50% that year!).
Here’s a look at the markets path this month:
And here is a breakdown of the different sectors this month:
There wasn’t a lot of news moving markets this month. Investors paid close attention to economic reports since the direction of the economy would dictate the direction of the Fed’s stimulus policy. We also had corporate earnings from the fourth quarter starting to roll in.
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CORPORATE EARNINGS
We’ll start with corporate earnings. We’re still early in earnings season, but reports released so far have been pretty lackluster.
Our takeaway is that companies aren’t selling as much “stuff,” but they’ve raised prices so much on the products that did sell, so they are actually bringing in slightly more money.
However, companies are warning that they see sales slowing further and they can’t raise prices much more, so their earnings are likely to be weaker later this year. This could weigh on the markets.
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ECONOMY
We’re seeing more signs that the economy is slowing. The fourth quarter GDP report was released this month and while it showed an increase of 2.9%, this was down from 3.2% the previous quarter.
We’re also seeing more and more companies planning massive job cuts, with some companies announcing thousands or tens-of-thousands of cuts.
An indicator we don’t talk much about here is the leading economic indicator index, which is an index that combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).
As you can see in the chart below, this index has been steadily trending lower and has never declined this much without a recession following.
As you can see in the chart below, this index has been steadily trending lower and has never declined this much without a recession following.
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INFLATION
Switching gears to inflation, which has been closely watched by investors since this is a major factor for the Fed and their stimulus policy.
When measured on an annual basis, inflation ticked lower last month. This is what the Fed wants to see, so investors were encouraged and stocks rose as a result.
When looking at it month-by-month, inflation FINALLY moved lower.
However, when excluding food and energy (this is called the ‘Core’ measurement), inflation is continuing to rise every month.
Inflation at the business level (the PPI) is trending lower, too.
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OTHER ECONOMIC DATA
Economic data released this month was mostly lower, also signaling a slowing economy.
Both the manufacturing and service sides of our economy contracted the previous month, which is a worrying sign.
Retail sales moved lower again, posting their biggest drop in nearly a year.
The one outlier economic report showing a solid gain was durable goods (these are items with a longer life, like a phone or refrigerator), which popped higher.
Consumer confidence has been trending higher since the middle of 2022, but had a slight decline last month.
Confidence at small businesses also turned lower.
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Where does the market go from here?
Stocks are on the expensive side right now on a short term basis (looking out a few weeks).
We can’t make any firm declarations, though, since there is a Fed policy announcement later today that is likely to have an impact on the direction of the markets this month. Conditions have been moving the Fed’s direction, so its possible they will lighten up on their stimulus withdrawal. But with this Fed, they like to talk tough, so it’s hard to predict what their policy will be.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
