January 2023 Review and Outlook

Executive summary

• Slowing economic data helps drive “soft landing” equity rally
• Nasdaq posts best January since 2001
• Corporate earnings show lackluster growth 
• Yield curve remains inverted

Index performance for January:

Goodbye 2022, hello 2023. U.S. equities posted strong gains in January following last year’s dismal performance. One key factor was optimistic investor sentiment, based on moderating inflation data, that the Fed could pull off a soft-landing scenario as opposed to a much-feared deep recession. Other factors included a softening dollar, the reopening of the Chinese economy, the easing of supply chain restraints, declining energy prices and a lower bar for corporate earnings.

The Federal Open Market Committee is expected to increase the federal funds rate by 25 basis points Wednesday (February 1st) at the conclusion of its two-day meeting, setting the benchmark target range to 4.5%-4.75%. In an effort to tame inflation, the FOMC raised rates seven consecutive times in 2022, including four 75-basis point hikes in a row, followed by a 50-basis increase at the last meeting in December. Wednesday’s move is expected to be followed by one more 25-basis point hike in March, which may bring an end to the current Fed rate hike cycle. There will be no update to their economic projections (SEP) at this meeting, so any directions on further policy moves will come during Chairman Powell’s ensuing press conference. Most investors expect a “terminal rate” of between 5%-5.25% and for this rate to remain in place for most or all of 2023.

The Nasdaq Composite posted its best January performance this past month since 2001. After falling over 32% in 2022, the index rebounded to start the year with a 10.7% gain. All major indices posted positive gains in January and are now trading at or above their 200-day simple moving averages, a sign of positive market breadth.

For the month, on a total return basis, the Nasdaq 100 Index and the Nasdaq Composite both advanced over 10.7%, the S&P 500 gained 6.3%, the Dow added 2.9% and the Russell 2000 rose 9.7%. Many of the laggards of 2022 saw sharp increases to start the year, including many Consumer Discretionary, Technology and Communications names.

Rate Hike Odds

The table below shows the number of implied rate hikes anticipated by the market via fed fund futures pricing. Currently, the market expects a 25bp rate increase at the February Fed meeting.

Sector performance total return for January:

S&P 500, one year:

Russell 2000, one year:

Nasdaq-100, one year:

Treasuries

We saw some weakness in Treasury yields across the curve in January. The yield on the benchmark U.S.10-year Treasury now sits at 3.51%, below the October peak of 4.25%. The 30-year yield has stayed below 4% since November and now sits at 3.64%. Yield on the shorter-term 2s faded over the month as equity markets have posted a nice run and now yield 4.21%. However, many aspects of the yield curve remain inverted, such as two-year treasuries yielding more than 10-year maturities.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

2-year Treasury yield, one year: 

10-year Treasury yield, one year: 

30-year Treasury yield, one year: 

Earnings commentary

With about one-third of S&P 500 companies reporting, Q4 profits have declined 5% compared to an expected 3.2% decline expected at the start of the quarter. 

Earnings are expected to remain down by about 2-3% for Q1 and Q2, with earnings growth resuming in the second half and calendar year earnings growth to be 3.4%, with revenues growing 2.6%. 

According to Bloomberg data, the average upside beat is 2.83% for the quarter, while sales increased by 1.06%. The earnings growth rate stood at +3.70%, while sales growth rose 7% (mostly led by Utilities). Sectors that saw outsized earnings growth included Energy (+78%), Industrials (+54%) and Consumer Discretionary (+32%), while Materials (-43%), Communications (-15%) and Financial (-13%) declined.  

VIX

Volatility subsided into month’s end as investor and Federal Reserve projections on the future path of interest rates are starting to align. The CBOE Volatility Index (or VIX), also known as the fear gauge, sank 11% in January. The VIX saw an intraday high of 23.76 on January 3rd before getting as low (intraday) as 17.97 on January 27th, before ending the month with a 19 handle.  

VIX, January:

VIX, two-year:

Economic commentary

The U.S. Department of Labor’s January 6th Employment Situation Report for December was not as strong as some feared, which aided equity markets and risk-off sentiment. Overall, though the jobs market remains somewhat tighter than the Fed would probably like in order to combat price increases, the data on inflation is cooling enough to allow the market to believe there won’t be rate hikes beyond those expected. The removal of such uncertainty supported stocks in January.

Job creation surprised to the upside (+223,000 new vs. +205,000 consensus); however, the prior month was revised lower (+256,000 vs. +263,000 previously). Hourly wages declined, coming in below consensus (+0.3% vs. a downwardly revised +0.4% M/M and +4.6% vs. another downwardly revised +4.8% Y/Y). The unemployment rate also ticked lower to 3.5% (consensus was +3.7%) vs. November’s 3.6% (downwardly revised from 3.7%), while the labor force participation rate increased to 62.3% from 62.1% M/M. 

December’s headline CPI declined for the month, in-line with economist expectations. Total CPI decreased 0.1% M/M and is up 6.5% Y/Y, a decline of 0.6% from November. Food costs increased again (+0.3% M/M and are now up 10.4% Y/Y). Energy decreased 4.5% and is now up 7.3% Y/Y. Less food and energy, core CPI increased 0.3% M/M and +6.5% Y/Y.

PPI fell more than expected in December (-0.5% vs. -0.1% consensus, which included a downwardly revised +0.2% in November). On a Y/Y comparison, the index now stands at +6.2% (consensus +6.8%) vs. a downwardly revised +7.3% in November. The index for final demand, less foods and energy, increased less than expected (+0.1% M/M vs. +0.3% and +5.5% vs. +6.2% Y/Y). 

Retail sales declined in December, falling for the second consecutive month, as the U.S. consumer spent less than expected. December retail sales (which do not adjust for inflation) fell 1.1% M/M (consensus -0.9%). Ex-autos, retail sales declined 1.1%, below the consensus of -0.5%. 

In a sign of a continuing tight labor market, U.S. Initial Jobless Claims declined for the week ending January 21st. New claims were 186,000 (consensus 205,000) and below the four-week average of 197,500. Continuing jobless claims increased to 1.675 million, above the four-week average of 1.664 million.

The U.S. Department of Commerce released the advance estimate for Q4’22 GDP showing mild growth at +2.9% (consensus was +2.6%). The Q4 GDP Chain Deflator (price index) rose +3.5% in Q4 after rising +4.4% in Q3. Personal Consumption (the largest input into GDP) increased by 2.1%, which was below the consensus of +2.9% growth.

Personal income increased in December by +0.2% (November was downwardly revised by 0.1% to +0.3%). Personal spending in December declined -0.2% from November’s also downwardly revised -0.1% level. Real personal spending fell 0.3% M/M. 

The PCE Price Index in December increased +0.1% from November but declined on a Y/Y basis to +5.0% versus +5.5% in November. Core PCE Price Index, which excludes food and energy, rose 0.3% vs.0.2% in November. And now stands at +4.4% Y/Y (November was +4.7%).

The Conference Board’s Consumer Confidence Index declined in January to 107.1 (consensus of 109) from an upwardly revised 109 (from 108.3) in December. The January Present Situation Index increased to 150.9 from 147.4 and the Expectations Index declined to 77.8. The Conference Board notes that when the Expectations Index is below 80, the likelihood of recession remains high.

The Labor Department’s Employment Cost Index (ECI) for Q4 showed moderate growth at +1.0% (consensus +1.1%) and below the 1.2% growth in Q3. This ties in nicely with the slowdown in hourly wage growth previously reported in the Jobs report at the beginning of the month. Wage growth is one of the items the FED has been noting as an area of concern in taming inflation. 

CPI Inflation – MoM: 

CPI Inflation – YoY:

Commodities

Oil:

Oil prices declined seven of the last eight months. In January, prices declined 1.5% but increased nearly 8% from the early January lows. WTI traded as high as $123.70 back in March, a 14-year high. On a Y/Y basis, oil is down 10% and down 23% since that March high.

Crude Oil front month contract for January: 

Gold:

Gold spot prices, higher for three consecutive months, rose nearly 7% in January before settling +5.8%. Since the March high of $2,050, Gold is down 5.9%. 

Dollar:

The U.S. dollar ticked lower for four consecutive months on the expectation that central banks will slow the rate at which interest rates are being raised as inflation pressures somewhat ease. The U.S. Dollar Index declined 1.35% in January and is down 10.5% from the September peak of $114.

Cryptocurrency:

Uncertainty in the crypto space will continue in the foreseeable future following the collapse of FTX. Solvency issues, government intervention (both domestic and abroad) and criminal charges for those involved will continue to make headlines and drive volatility into the sector. Inflation and central bank policy will also drive prices. 

Bitcoin declined over 60% in 2022. However, in January, Bitcoin rallied nicely (as has the broader equity market), increasing 39% to start 2023. 

Looking ahead

The FOMC will release its target interest rate range on February 1st. Market participants will be paying extra attention to Chairman Powell’s post-release interview for inflation commentary, terminal rate expectations (higher for longer messaging) and expectations of a potential rate cut in the back half of this year, though hopes for that are fading. Key releases to watch after the FOMC rate decision (2/1) will be the January jobs report (2/3), CPI (2/14), retail sales (2/15) and PPI (2/16). Since 1929, a January increase in stock prices has led to positive full-year returns about 80% of the time.  

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