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January 2023 Monthly Commentary

Updated: May 15

January 2023 Monthly Commentary

January Market Review

Both equity and bond markets notched excellent January returns to kick off 2023. Despite mixed earnings and an expected vigilant Fed, lower economic/inflation figures and job cut headlines gave investors solace that the tightening cycle will be ending soon.

  • The SPX rose +6.28% in almost a “mirrored” reversal from last month. The Nasdaq led US equity markets higher, rising by +10.73%. The Dow Jones Industrial Average rose just +2.93%. Consumer discretionary stocks and communication services led equity sectors higher (+15.02%, and +14.50%. respectively). Historically defensive sectors were the only areas without positive performance. Utility equities fell -2% and the healthcare sector dropped -1.87%.

  • Bond markets also rallied, except in very short maturities. The US yield curve moved lower, with even more yield curve inversion. Two-year treasury notes fell by 22.5 basis points last month, ending the month with a yield of 4.20%. The bell-weather 10-year Treasury note fell by 37 basis points to yield 3.51% at month end. The “belly” of the curve, 5- 7-year bonds, fell the most in yield and the highest point on the yield curve remains in the 6-month treasury bill at 4.75%. This highlights the market perception that a Fed easing cycle could begin as soon as the fall.

  • Fixed income sectors and credit investments also had strong returns in January. Municipal bonds rose 2.87%, as more cash chasing fewer bonds continues to be a trend in the muni market. Investment grade corporate bonds rose 4.01%, as a robust new issue market (except for new bank issues) was well received by investors. Risk premium spreads moved lower, and even high yield rose 3.81% despite the high-profile bankruptcy of Bed Bath and Beyond (BBBY). Hard currency EM rose 3.28%, and the broad US securitized sector rose 3.28%. Preferred bonds, in sympathy with strong equity markets, rose over 10% last month.

Data Recap

Considering a tumultuous 2022, along with another tight spot for the Federal Reserve, it is no surprise that markets began the year with a heightened sensitivity to every new data point. January started with what many dubbed as a “perfect” job report for both investors and maybe for the FOMC.

  • On January 6th, the U.S. Bureau of Labor Statistics released a modest but slightly better-than-expected job growth of 220k new jobs for the month. This was coupled with average hourly earnings for workers at 4.6%, much lower than the 5% expected. This spurred market participants to envision the hopeful “soft-landing” scenario in the economy could be realistic. Lower inflation, particularly lower wage inflation, coupled with moderate job growth, was the initial catalyst for January’s “green shoots”. Later that morning, a very weak service sector report, reinforced a “bad news is good news” theme for markets.

  • In addition, other stand-out reports showed a distinct slowing in economic activity in the United States. Retail sales were reported much lower for December, and November was revised lower as well. The bond market rallied sharply on this data.

  • Some areas of manufacturing began to show real contraction. In particular, the Empire State Manufacturing Data, with levels of new orders, prices, and employment, falling to levels not seen since the pandemic data of May 2020.  

  • Inflation data, CPI and PPI, were reported close to expectations, but were lower than previous reports and suggested a falling trend in inflation. Core reports (ex-food and energy) for CPI were 5.7% year-over-year from the previous 6% reading. PPI core data fell to 5.5% from 6.2% year-over-year. The GDP price index fell, as did core PCE for the 4th quarter. Lastly, while still elevated, the employment cost index fell to 1%, from 1.2% reported in the third quarter of 2022.

  • Corporations played a dual role in the macroeconomic backdrop at the beginning of this year. Both earnings reports and job cut headlines were factored into market direction daily. Earnings season so far has been mixed, from an already lowered expectation. Bank earnings began the season with big winners and big losers. Even as some companies beat EPS and revenue, guidance for the year proved an important data point.

  • A good example was Microsoft earnings. While reported earnings were substantial, guidance and slowdowns in key areas hurt equity prices. Maybe more important to global markets than their earnings was the headline they made a week before the earnings release. MSFT announced they would lay off 10,000 workers immediately. There were over 25,000 tech sector layoffs within the first few weeks of January. Many other companies in various sectors announced similar cuts in the workforce.

Despite all the data and news reports, the month of January still seemed like posturing for the first Federal Reserve meeting of 2023, Jan. 31-Feb. 1 (as this report is being written). While the FOMC had its usual “blackout” period during the last week of January, the comments from earlier in January were still in line with their previous hawkish rhetoric. 

  • On Jan. 9th Fed governor Bostic made comments including that the Fed was “willing to do too much” in terms of tightening to bring inflation down to the 2% range.

  • Fed Governor Daly added that it was prudent “to move above 5% and stay”.

  • Many key macro investors also spoke publicly about the current FOMC situation. Paul Tudor Jones suggested the Fed’s job this year would be difficult and achieving an economic soft landing would be as hard as “a perfect moon landing”. Jeffrey Gundlach told business news to ignore what the Fed is currently saying and listen to what the bond market is telling us (inverted curve, cuts will happen in 2023).

  • As the Fed decision was made on Feb. 1st, rates were raised 25 basis points to 4.75%. The resolve to fight inflation was apparent, and the door remained open for more than 25 basis points increases in upcoming meetings. Following the announcement, both bond and stock markets rallied, and many market participants focused on one point Chairman Powell made in his comments, saying he thinks ‘the disinflationary process has started’.

The debt ceiling debate once again reared its ugly head in January. While markets mostly ignored the recurring politics, it is certainly an upcoming tail risk, given the magnitude of an “unfathomable” error by elected government officials. Given the increasing coupon interest the government will be paying on new debt, it feels like there are elevated risks to this occasional political stand-off. Earlier in January, Treasury Secretary Janet Yellen, used some extraordinary measures in treasury financing, to avoid a federal government default. In her letter to House and Senate leaders, her actions should buy time until June, but hopefully, Congress can pass legislation to raise the nation’s debt borrowing authority or suspend the limit for a period. The Assistant Treasury Secretary for Economic Policy, Ben Harris, stated: “Even the threat that the US government might fail to meet its obligations may cause severe harm to the economy by eroding household and business confidence, injecting volatility into financial markets and raising the cost of capital- among other negative impacts”.

The Piton team continues to offer customized portfolios and solutions to meet your needs through all market and interest rate environments. Please let us know how we can help you and your clients, we are here to serve as an extension of your team.


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