Market Commentary: January 2023

At a Glance

• Stocks and bonds rallied in January on expectations of a “soft landing”
• Equity sector returns showed a reversal in leadership
• Inflation continues to slow, but still strong labor markets keep the Fed aggressive 
• Corporate earnings decline hasn’t been as deep as feared which can support equity returns

A Nice Start

Assets across the risk spectrum rallied in January as investors saw signs that easing inflation would allow the Fed to reduce the magnitude and duration of future interest rate increases while avoiding tipping the economy into a recession. Equity markets surged over the month with the S&P 500 Index up 6.28%, a welcome reversal of December’s weak returns and last year’s 18% decline.¹ Fixed income market also delivered positive returns, rising over 2% in all segments except the very shortest-term bills and bonds. While the Fed continued to push up short-term rates, longer-dated interest rates fell, with the 10-Year Treasury yield down to 3.52% from 3.88% at the start of the year.²

In the equity markets, there was a reversal in some of the leaders and laggards compared with last year. The NASDAQ composite index posted a 10.76% gain in December while the Dow Industrial index rose 2.93%, a substantial shift from 2022 when the Dow outpaced the NASDAQ by over 25%.^3 4 Small Cap Value stocks on the other hand continued their market leadership, rising 11.96% for the month, almost 5% ahead of the growth half of the small cap market.⁵  International stocks also resumed the rally that began in October, with the S&P Global ex US Broad Market Index up 7.85% in December with many European country markets up double digits.⁶

Equity Returns: January 2023 and 2022

Reversals in fortunes were especially noticeable among S&P 500 equity sector returns in January. The defensive industries (utilities, healthcare and staples) that fell the least last year were the only sectors to post negative returns in January.⁹   Conversely, the economically sensitive sectors that had sold off most last year fared best in January, with Consumer Discretionary and Communications Services stocks up over 14% for the month.¹⁰ While lagging the broad market, energy stocks still rose almost 3% for the month as oil prices have hovered around $80/barrel year so far this year.¹¹

S&P 500 Economic Sector Returns: January 2023 and 2022

Inflation, recession and earnings 

Inflation gauges have started to fall recently, giving hope that the Fed will be less aggressive with interest rate increases going forward. The core CPI (less food and energy) fell 0.1% in December from the prior month, but remains 5.7% above last year’s level.¹³  The core Personal Consumption Expenditures price index, which the Fed pays a bit more attention to, rose in December from November and is now up 4.4% from a year earlier (down from 5.2% year-over-year in September 2022).¹⁴ Consumer inflation expectations have also fallen, with the University of Michigan survey showing consumers expecting 3.9% inflation over the next year, down from 5.4% last spring.¹⁵ The improved inflation picture has indeed led the Fed to smaller rate increases (50bp rise at the December meeting and 25bp on February 1), but comments from Chairman Powell and other Fed members indicate they are very concerned with ending the rate increases too soon.¹⁶

The good news is that the sharp rate increases have not tipped the economy into recession so far. Consumer spending has slowed but employment growth remains extremely strong despite a steady stream of layoff announcements.^{17 18}  Corporate earnings have also held up relatively well. Based on the 44% of the S&P companies that have reported results so far this year, Q4 2022 earnings are expected to be up 3.2% over Q3, but 8.8% below the record level achieved in Q4 2021.¹⁹

Taking these elements together, we have, as always, some mixed messages for investors to digest. Slowing economic growth to defeat high inflation is what the Fed wants. They have suggested that they aren’t satisfied that they have accomplished that goal yet. Four percent annual inflation is not that close to their 2% target. Still, investors seem to have priced in a less hawkish Fed and at worst a mild recession early this year and relatively solid corporate earnings growth. The strong returns in January reflect that investor optimism. The risks for markets in the near-term are that even with the Fed ratcheting down interest rate increases in line with expectations, the slowdown in the economy and earnings could easily be greater than expected and asset prices will then have to adjust.

¹ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes 

² https://fred.stlouisfed.org/series/DGS10 

³ https://www.nasdaq.com/market-activity/index/comp/historical 

⁴ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes 

⁵ https://www.spglobal.com/spdji/en/index-family/equity/us-equity/us-style/#overview 

⁶ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes 

⁷ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/ 

⁸ https://www.nasdaq.com/market-activity/index/comp/historical  

⁹ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/ 

¹⁰ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/ 

¹¹ https://fred.stlouisfed.org/series/DCOILWTICO 

¹² https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/ 

¹³ https://www.bls.gov/cpi/ 

¹⁴ https://www.bea.gov/news/2023/personal-income-and-outlays-december-2022 

¹⁵ http://www.sca.isr.umich.edu/files/tbcpx1px5.pdf 

¹⁶ https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230201.pdf 

¹⁷ https://www.bea.gov/news/2023/personal-income-and-outlays-december-2022 

¹⁸ https://www.bls.gov/ces/ 

¹⁹ https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/

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