February 10, 2023

Historically, January returns can set the tone for the full year price action and January of 2023 is off to a strong start. During the last month, the NASDAQ index had four positive weeks in a row and ended the month up by 10.73%. The S&P 500 index closed up by 6.28%. The price of gold has steadily risen since the year started for a gain of 5.76% as shown from the SPDR Gold Trust (GLD) ETF. The US 10-year Treasury rate opened the year at 3.87% and ended the month at 3.51% supporting a rally in bond prices. At first blush these each appear to be striking successes after a disappointing 2022, but it would be foolish to not look at the whole picture.

Unfortunately, due to their bounce from historic lows, some of these numbers are slightly less impressive, and all the upward trend that we’ve seen this last month was slow to get started. Global markets fluctuated in the beginning of the month before picking up steam in the final weeks. In the first week of January, most equities were still trending downward as the S&P still traded below its 200-Day Simple Moving Average. Equities quickly turned around as inflation has cooled from its 2022 high water mark. However, it’s still difficult to be overly optimistic about the returns of the recent weeks as the Federal reserve still echoed that ongoing rate increases will be necessary. This may have the effect of weakening earnings expectations. If the rest of the year follows the currently predicted downward trend, then January will have been awfully deceiving.

All three major indexes experienced growth this month but it’s impossible to project if this trend will continue throughout the year. Inflation remains high, interest rates are still increasing, and the housing market has shown significant signs of softening. Amidst all this uncertainty many companies have begun to see major job cuts. The Gross Domestic Product (GDP) is currently increasing at a better-than-expected 3.2%. This is a rate that demonstrates the resiliency of the US economy despite the Federal Reserve’s aggressive hiking campaign. But as many market participants, and even the FED, have pointed out, we are still not sure if the full effects of the higher rates have filtered through all parts of the economy.

Historically, February has not been the best month for equity markets, including the S&P 500, but hopefully the current price action that we’ve seen in January will hold true for the remainder of the year. There is a lot of uncertainty surrounding Federal Reserve chairman Jerome Powell and the FED-driven monetary overhang in 2023. However, there remains the possibility of markets having less uncertainty regarding the current hiking cycle and this current retreat from the Fed’s aggressive rates hikes could prove to settle markets in the short-to-intermediate term. Historically, we’ve seen the Fed take aggressive action in the face of inflation. Therefore, it was no surprise to see the Federal Open Market Committee (FOMC) increase interest rates by a mere 25 basis points from 4.50% to 4.75%. Following the increase, Powell stated that the FED’s position is one that “continue[s] to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” ¹

It is unlikely that policy will loosen this year if the labor market continues to remain extremely tight at its current levels. Although the FED expects no interest rate cuts in 2023, the central bank’s peak policy rate is predicted by some analysts to top out in July of this year. Due to recession uncertainty in the coming months, it seems a decrease in rates this year may only be warranted if the FED attains its goal of returning inflation to its 2% target. Which, again, may not be entirely possible without disinflation relief induced from a recession.  

Brian Rosso, CFA
Portfolio Management Analyst

Hazel Allen
Portfolio Management Analyst