If December capped a disappointing end to a dreadful year, January sparked the hope for better days ahead in 2023. The first month of the new year saw positive returns for stocks and bonds, flipping the script from 2022, where both risky and safe haven assets fell in tandem and there were precious few places for investors to hide. The negative sentiment that plagued the markets last year – rampant inflation, aggressive monetary tightening with no end in sight, etc. – was supplanted by a cautious optimism that the Federal Reserve would orchestrate a “soft landing” scenario in which a deep, protracted recession might be avoided. All told, the S&P500 rose 6.28% while the US Aggregate Bond Index rose by 3.08%.
Capital markets were driven largely by the usual economic releases and an early look at corporate earnings. December data were mixed to slightly positive, with 223K jobs created in December and a yearly inflation rate ticking down to 6.5%. While the CPI remains high by (recent) historical standards, it does appear that inflation is moving in the right direction. While we remain far from the Fed’s inflation target, slowing prices are a tailwind for markets, and signal that the central bank may hit the pause button this spring, which could add more fuel to the rally we have seen to start the year.
While economic data look encouraging, corporate earnings paint a murkier picture. Fourth quarter 2022 earnings season is nearly complete, with over 95% of the S&P500 having reported. Of the companies who have reported, only 67% have beat Wall Street estimates, down from the average beat rate of 76% over the last year. This could portend an earnings recession as the lagged effects of a relentlessly strong US dollar and higher levels of interest rates work their way through the economy.
From a technical standpoint, an encouraging picture is beginning to emerge. The S&P500 has overtaken its 200-day moving average (DMA), which history has shown to be fairly meaningful. Often, when the market breaks above this key technical level – and holds during subsequent tests – it indicates a change of character in the market and the emergence of a new trend. The “golden cross” phenomenon, whereby the 50DMA overtakes the 200DMA, might lend some credence to this technical bullishness. If the market can maintain its recent breakout above the 200DMA with positive fundamentals behind it, we could be looking for a retest of high levels seen in August 2022. Time will tell.
Against this mixed backdrop, we remain balanced with a slightly more cautious tilt. We have emphasized the short end of the yield curve, increasing positions in Treasury securities with durations in the 1-3 year range. Simultaneously, we have de-emphasized commodity positions in response to cooling inflation and the potential for subpar economic growth going forward. By focusing on the intermediate and long term, we believe we can hold allocations through short-term noise and remain exposed to desired asset classes in a disciplined, repeatable way. Here’s to a prosperous 2023 – cheers!
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged, and investors cannot invest directly into an index.