Monthly Archives: January 2023
Stock Prices Move Higher as Inflation Cools
Market Data as of Week Ending: 1/27/2023 unless noted otherwise
Equities
U.S. stock prices moved higher as investor sentiment has improved, despite a weaker outlook for the business cycle. The estimated earnings decline for the fourth quarter has expanded to -5.0% and most of the companies that provide guidance have projected lower estimates for the first quarter. Growth stocks once again outperformed their value-oriented counterparts, while the size factor was more mixed, but large-sized companies generally outperformed small and mid-sized peers. Nine of the economic sectors delivered gains with notable strength in the consumer discretionary, information technology, and communication services sectors. Traditionally defensive sectors lagged with declines in the healthcare and consumer staples sectors. Developed foreign and emerging markets stocks ended the week with gains for the fourth consecutive week; however, relative performance in both markets lagged domestic equities.
Bonds
U.S. Treasury yields were mixed as yields edged higher for short to intermediate term bonds and the 10-year ended the week at 3.52%. New economic data did not change investor expectations, which remain confident that the Fed will slow the pace of interest rate increases to 0.25%, at the upcoming meeting. Returns were mixed across the quality and duration spectrum as long duration corporate bonds were the best performing segment. Yields were largely unchanged for investment grade corporate bonds and some spread tightening was observed for high yield bonds, ending the week at 5.0% and nearly 8.2%, respectively.
Macroeconomic Data
Economic data came in mixed with better-than-expected inflation data showing signs of deceleration and solid economic growth, despite recent declines in consumer spending and a weak outlook according to survey data. The PCE index showed that headline inflation slowed to 5.0% and the core measure (excluding food and energy prices) dropped to 4.4%, its lowest increase since October 2021. Economic growth, as measured by GDP, increased 2.9% in the fourth quarter and 2.1% for the calendar year 2022. The bad news was that consumer spending fell in December for the second consecutive month, despite lower prices. According to S&P Global, the outlook for economic growth has improved, but the flash composite PMI is still pointing toward a contraction with a 46.6 reading. The outlook in Europe is starting to improve as business confidence increased and the flash composite PMI improved to 50.2, showing signs of optimism for the first time since June of last year.
Stock Prices Mixed as Economy Weakens
Market Data as of Week Ending: 1/20/2023 unless noted otherwise
Equities
U.S. stock prices settled back in with mixed results across major indexes. We are still early into reporting season (only 11% of companies in the S&P 500 reported), but the estimated earnings decline has expanded to -4.6%. The trend of growth stocks outperforming their value-oriented counterparts continued, but smaller-sized companies lost some of their appeal and lagged their mid and large-sized peers. Performance across economic sectors was mixed with some gains in the consumer discretionary, information technology, and energy sectors. The rest of the sectors were down with notable weakness in the industrials, utilities, and consumer staples sectors. Developed foreign and emerging markets stocks ended the week with gains for the third consecutive week as both markets finished ahead of domestic equities.
Bonds
U.S. Treasury yields were also mixed with lower yields for short to intermediate term bonds and higher yields for long duration bonds. The 10-year ended the week at 3.48% as investors were delivered strong signals from the Fed that they are on course to reduce the pace of interest rate hikes again. According to CME, futures pricing indicates a 99% probability of a 0.25% interest rate hike at the upcoming meeting. Returns were mixed across the quality and duration spectrum as investment grade corporate bonds were the best performing segment. Yields were largely unchanged for investment grade corporate bonds and some spread widening for high yield bonds, ending the week at 5.0% and nearly 8.3%, respectively.
Macroeconomic Data
Economic data came in generally worse than expected as both retail sales and industrial production fell in the month of December. Retail sales declined -1.1% in December as holiday sales were disappointing despite heavy discounting by retailers to clear inventory. Industrial production declined for the second consecutive month in December (-0.7%) as higher interest rates and prices weighed on demand. The housing market remains challenged with declines in both new and existing home sales, but results for December were better than expected. Initial jobless claims dropped below 200,000 as the labor market remains robust with 10.5 million job openings and 3.5% unemployment. European leaders at the ECB and BoE remain committed to fighting inflation with higher rates while signs are emerging that inflation may be on the rise in Japan.
Stock Prices Gain as Inflation Cools
Market Data as of Week Ending: 1/13/2023 unless noted otherwise
Equities
U.S. stock prices rose again in the second week of the year as investors digested a softer inflation report and companies begin to report fourth quarter results. Consensus expectations for the companies in the S&P 500 have narrowly improved to an estimated earnings decline of -3.9%, however, investors will also be focused on forward guidance and underlying business fundamentals. Growth stocks outperformed their value oriented counterparts and small-sized companies outshined both their mid and large-sized peers. Most of the major economic sectors were up for the week with two traditionally defensive sectors, consumer staples, and health care, as the only exceptions. Developed foreign and emerging markets stocks ended the week with solid gains as both markets finished ahead of domestic equities.
Bonds
U.S. Treasury yields fell across the curve as the 10-year ended the week at 3.49% as investors have been embracing a barbelled approach of equity risk and high quality bonds. The front-end of the yield curve was effectively unchanged as the 2-year finished around where it started and the 2-10 spread remains in negative territory at -0.73%. Returns were positive across the quality and duration spectrum as long duration corporate bonds were the best performing segment. Yields declined for both investment grade corporate and high yield bonds, ending the week at 5.0% and just below 8.2%, respectively.
Macroeconomic Data
Economic data came in generally better than expected as all eyes were concentrated on the inflation report and what that may mean for the upcoming Fed decision. The December headline Consumer Price Inflation (CPI) dropped for the sixth consecutive month, when measured on a year-over-year basis, and fell for the first time since May 2020, when compared to the previous month. Core CPI (excluding food and energy) slowed to 5.7% as goods prices declined but prices remain buoyed by strength in shelter and services. Initial jobless claims fell for the first week of the year to 205,000 as the labor market remains robust with 10.5 million job openings and 3.5% unemployment. The World Bank cut its estimate of global growth from 3.0% down to 1.7%, citing high inflation, rising borrowing costs, reduced investment spending, disruptions in China, and Russia’s invasion of Ukraine as key detractors.
Stocks Respond Favorably to Mixed Economic Data
Market Data as of Week Ending: 1/6/2023 unless noted otherwise
Equities
U.S. stock prices regained their footing as most major indexes ended in positive territory for the first week of the year. Stocks responded favorably to economic reports that support a less restrictive stance from the Federal Reserve. Value stocks outperformed their growth oriented counterparts and mid-sized companies outshined both their larger and smaller sized peers. Most of the major economic sectors were up for the week with health care as the only exception, ending the week with a modest loss. Analyst expectations have been lowered over the past several weeks as the consensus estimate for fourth quarter earnings growth has been reduced to -4.1%. Developed foreign and emerging markets stocks ended the week with solid gains as both markets finished ahead of domestic equities.
Bonds
Intermediate and long-term U.S. Treasury yields dropped sharply on Friday as the 10-year ended the week more than 0.30% lower at 3.63%. The front-end of the yield curve was effectively unchanged as the 2-year finished around where it started the year at 4.70%. Returns were positive across the quality and duration spectrum as long duration government bonds were the best performing segment. Yields moved lower for both investment grade corporate and high yield bonds, ending the week at 5.2% and just below 8.5%, respectively
Macroeconomic Data
Economic data were generally mixed with investors focused on employment reports and Fed minutes. Job openings were essentially unchanged in November ending the month at 10.5 million and unemployment slowed to 3.5% in December. Hiring and wage gains are starting to decelerate which should support a reduction in the pace of rate increases from the Fed. Minutes from the Federal Reserve meeting in December show that committee members are concerned about easing in financial conditions absent a significant reduction in inflation. Services PMI data from both ISM and S&P point toward contractionary territory as new orders fell again in December. Manufacturing PMI data is also below the 50 level with weaker demand and slower output. In Europe, inflation fell below 10% for the first time in two months as lower energy prices brought the figure down to a 9.2% annual increase.
Stocks Prices End the Year Down as Investors Grappled with Higher Interest Rates and a Slowing Economy
Market Data as of Week Ending: 12/30/2022 unless noted otherwise
Equities
U.S. stock prices finished with modest losses for the final week of the year. The S&P 500 closed out the year down more than 18% as investors grappled with higher interest rates and a slowing economy. Size and style were mixed for the week, but for the year, the value factor significantly outperformed growth and mid-sized companies outshined both their larger and smaller-sized counterparts. Most of the major economic sectors were down for the week; however, financials and energy were exceptions with modest gains of less than 1%. For the year, sector dispersion was wide as communication services and consumer discretionary sectors were down more than 35% while energy stocks were up more than 65%, despite only a modest rise in oil prices. Developed foreign and emerging markets stocks ended the week with small gains as the dollar weakened throughout the quarter and developed foreign stocks finished the year ahead of domestic equities.
Bonds
U.S. Treasury yields moved higher last week as the 10-year reached its highest level since the middle of November. The 2-year and 10-year ended the year at 4.71% and 3.97%, respectively, as the spread narrowed yet still is near its widest level of inversion over the last four decades. Returns were negative, but mixed, across the quality and duration spectrum as short duration investment-grade corporate bonds proved most resilient. Yields moved higher for both investment grade corporate and high yield bonds, ending the year at 5.4% and just below 9.0%, respectively.
Macroeconomic Data
Economic data was light for the week with only a few reports that were generally better than expected. According to S&P, CoreLogic home prices declined for the fourth consecutive month, down 0.5% in October. Despite recent softness, the Case-Shiller National Home Price Index rose 9.2% compared to the same period last year. Weekly initial jobless claims increased by 9,000 to 225,000, which was in line with consensus and only slightly above the pre-pandemic levels in 2019. The number of available jobs has been declining with 10.3 million as of October; however, that far exceeds the 6.1 million unemployed people seeking work. In Asia, China announced plans to lift almost all standard COVID restrictions and that the government will boost fiscal expenditures next year to support economic growth.