- All major stock indices were up for the week with the S&P 500 and Russell 2000 both on pace for their best January since 2019. The tech-heavy Nasdaq Composite was able to stay positive for a fourth straight week and is on pace for its best January since 2001.
- Treasury yields were modestly higher with the benchmark 10-year U.S. Treasury yield dropping inching up +2 basis points (bps) to 3.50% and the 2-year UST yield up +3 bps to 4.20%. The Bloomberg U.S. Aggregate Bond Index was up +0.1% for the week while the Bloomberg Global Aggregate Bond Index ex U.S. slipped -0.1%.
- Economic and earnings data was subpar with the Leading Economic Indicators worse than expected with a 10th straight decline, U.S. manufacturing and services sector activity was still in contraction territory, as were the Richmond and Kansas City manufacturing indices. Q4-2022 GDP did grow more than expected, but it was mainly due to government spending and inventories piling up. Consumer Sentiment was higher than expected.
Stocks cruise, bonds snooze on mixed economic & earnings reports
U.S. stocks, both large and small, resumed their winning streaks in January, up in three of four weeks this month. The S&P 500 was up +2.5% for the week and the Russell 2000 was just behind at +2.4%, both on pace for their best Januarys since 2019. The tech-heavy Nasdaq Composite did even better, jumping +4.3% over the week, now up in all four weeks of January, and on pace for its best January since 2001. Non-U.S. stocks, both developed and emerging, have also advanced for each week of the new year, with the MSCI EAFE and MSCI Emerging Markets indices gaining +1.4% for the week.
The week started strong after a Monday Wall Street Journal article signaled that Fed members saw “ample evidence” of slowing economic demand and seemed to confirm market expectations for a quarter-point rate hike at the Fed’s policy decision announcement on Wednesday afternoon. However, economic and earnings data throughout the week were mixed and anything but clear regarding inflation and economic growth. On Monday, the Leading Economic Index (LEI) was worse than expected with its tenth straight monthly decline. The S&P Global report on U.S. manufacturing and services sector activity unexpectedly rose yet remained in contraction territory. The Q4-2022 GDP report was unexpectedly stronger than expected, showing economic growth up an annualized +2.9% in the quarter, but it was almost entirely driven by government spending and inventory increases. On Friday, the Fed’s preferred inflation gauge, the Core PCE Price Index, was in line with expectations at +4.4% year-over-year, which is well off the February +5.4% peak but is still more than twice the Fed’s +2.0% inflation target.
The weekly equity gains seem to be outpacing earnings results. With nearly 30% of the S&P 500 firms having reported earnings for Q4, results have been subpar with 69% exceeding earnings estimates, which according to FactSet, is below the 5-year average of 77% and the 10-year average of 73%. Earnings are currently on pace to decline -5.0% for the fourth quarter, which would be the first negative annual earnings since Q3-2020.
Unlike equities, Treasuries seemed to more closely match the mixed economic and earnings news. Treasury yields were rangebound in choppy trading over the week, with 2-year and 10-year U.S. Treasury yields up just three and two basis points respectively. As a result, the Bloomberg U.S. Aggregate Bond Index inched up +0.1% for the week, putting it up +3.0% in 2023. Non-U.S. bonds slipped -0.1% for the week but are up +3.6% for the year. The U.S. dollar continued to come off the highs seen in September and October.
Chart of the Week
U.S. economic growth slowed in the fourth quarter of 2022, concluding a year marked by supply chain issues, high inflation, and rising interest rates. The first estimate (of three) of Q4-2022 Gross Domestic Product (GDP), the broadest measure of economic output, slipped to a +2.9% quarter-over-quarter annualized rate for Q4-2022, down from +3.2% in Q3-2022, but beating Wall Street expectations for +2.6%. Consumer spending, the primary driver of economic growth, slowed in Q4 as well, with Personal Consumption coming in at +2.1%, a solid pace, but down from an unrevised +2.3% rise in Q3, and well below expectations for +2.9%. What made up for the slowing consumer spending? Inventory builds and government spending were large contributors to last quarter’s economic growth. In fact, government spending hit a record high in Q4, and the sharp rise in inventory made up half of the increase in GDP growth. Without government spending and inventory piling up, and trade, Private Domestic Demand was just +0.2% in Q4, the slowest pace in two and a half years. This was likely the last quarter of GDP before the lagged effects of the Federal Reserve’s fastest monetary policy tightening cycle since the 1980s are fully felt. However, the Fed is on track to slow interest-rate increases when it meets this week.
Economic Growth Cooled in Q4
U.S. real Gross Domestic Product (GDP), change from the prior quarter
Note: Seasonally adjusted at annual rates.
Source: Commerce Department, The Wall Street Journal.
- The December Conference Board’s Leading Economic Index (LEI) fell -1.0% for the month, worse than expectations for a -0.7% decline, and follows November’s downwardly revised -1.1% drop – marking the tenth consecutive monthly decline. ISM new orders, consumer expectations, average workweek, jobless claims, building permits, credit conditions, and the yield curve were all negative contributors, while consumer goods and capital spending were roughly flat. The Conference Board noted in its report, “The U.S. LEI fell sharply again—continuing to signal recession for the U.S. economy in the near term…There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead.”
- The preliminary January S&P Global U.S. Manufacturing PMI Index remained in contraction territory (a reading below 50), but unexpectedly rose to 46.8 from December’s unrevised 46.2, beating expectations for a decline to 46.0. The preliminary S&P Global U.S. Services PMI Index also remained in contraction territory, but rose to 46.6 from December’s upwardly revised 44.7, beating expectations for a gain of 45.0.
- The January Richmond Fed Manufacturing Activity Index fell much more than expected into contraction territory (a reading below zero). The Index dropped to -11 from a reading of +1 in December, far below expectations for a decline to -5. Shipments and employment became contractionary, while the growth in wages accelerated.
- The January Kansas City Fed Manufacturing Activity Index improved but remained in contraction territory (a reading below zero), rising to -1 from December’s upwardly revised -4 reading.
- Preliminary December Durable Goods Orders jumped +5.6% for the month, well above expectations of +2.5%, and the prior month’s positively revised -1.7% drop. Excluding transportation, orders dipped -0.1%, better than the expected -0.2% decline but down from the prior month’s unrevised +0.1% increase. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—decreased -0.2%, in line with expectations, and down from the prior month’s negatively revised flat reading.
- December Personal Income rose +0.2% for the month, matching expectations but down from November’s downwardly revised +0.3% rise. Personal Spending declined -0.2%, also in line with expectations and down from the prior month’s downwardly revised -0.1% decrease. The December Savings Rate as a Percentage of Disposable Income was +3.4%, up from November’s upwardly revised +2.9% rate.
- The PCE Deflator rose +0.1%, above expectations for a flat reading, and matching November’s unadjusted +0.1% gain. Compared to last year, the deflator was +5.0% higher, matching estimates, and down from the prior month’s unadjusted +5.5% rise. Excluding food and energy, the Core PCE Price Index rose +0.3%, matching expectations, and above November’s unrevised +0.2% rise. The index was +4.4% higher from last year, in line with expectations, and down from November’s unadjusted 4.7% rise.
- The U.S. economy grew below its historical average rate in December for the second straight month as the Chicago Fed National Activity Index (CFNAI) came in at minus -0.49, little changed from -0.51 in November. The CFNAI index, designed to gauge overall economic activity and inflationary pressures, is composed of 85 economic indicators. A negative value for the monthly index is associated with the economy growing below its average trend. Production-related indicators were the main driver of lower economic growth, but personal consumption and housing indicators also contributed negatively. In fact, the only broad category which contributed positively to the index was employment.
- December Pending Home Sales rose +2.5%, far above expectations for a -1.0% decrease and November’s upwardly revised -2.9% decline. But year-over-year Sales plunged -33.8% on the heels of November’s upwardly revised -32.5% fall.
- December New Home Sales rose +2.3% to an annual rate of 616,000 units, above expectations of 612,000 units, and November’s downwardly revised 602,000 units. The Median Home Price increased +7.8% from the prior year to $442,100. New home inventory declined to 9.0 months from November’s downwardly revised level of 9.2 months of supply. Sales rose for the month in the Midwest and South—with the former jumping—but fell in the Northeast and West. Sales in all four regions were lower year-over-year.
- The final University of Michigan Consumer Sentiment Index for January was unexpectedly revised higher to 64.9, from the preliminary 64.6 figure, where it was expected to remain. A modest downward adjustment to the current conditions portion of the index was more than offset by an upward revision to the expectation component of the survey. The 1-year inflation forecast was adjusted lower to 3.9% from the preliminary estimate of 4.0%, where it was expected to remain, and down from December’s 4.4% rate. The 5-10 year inflation forecast was downwardly adjusted to 2.9%, versus expectations to be unadjusted at December’s rate of 3.0%.
- The weekly MBA Mortgage Application Index rose +7.0% from the prior week’s +27.9% gain as the Refinance Index surged +14.6% and the Purchase Index jumped +3.4%. The third straight weekly increase came as the average 30-year mortgage rate slipped 3 basis points to 6.20%, up 2.48 percentage points versus a year ago.
- Weekly Initial Jobless Claims fell by -6,000 to 186,000 for the week ended January 21, below expectations for 205,000, and the prior week’s upwardly revised 192,000. Continuing Claims for the week ended January 14 rose by +20,000 to 1,675,000, above expectations of 1,658,000.
The Week Ahead
Next week’s economic calendar is busy and will compete with a flurry of earnings reports as the Q4 earnings season continues. A couple of key releases for economic data will be the monetary policy decision from the Federal Open Market Committee (FOMC) on Wednesday, with the markets expecting with near certainty, a 25 basis point rate hike, but the January employment report on Friday is also likely to gain a lot of attention. Other high-profile reports include the Job Openings and Labor Turnover Survey (JOLTS), the ISM and S&P Global Purchasing Managers Indices (PMIs), as well as housing data with the FHFA and S&P CoreLogic Case Shiller Home Price Indices (HPIs). There are also monetary policy decisions due overseas from the Bank of England and the European Central Bank. Regarding earnings reports, several tech heavyweights such as Amazon, Apple, Alphabet (Google’s parent), and Meta Platforms (Facebook’s parent) will report along with other big names like Exxon Mobile, ConocoPhillips, Ford, General Motors, Starbucks, McDonald’s, Pfizer, and Merck.
Did You Know?
WEAK DOLLAR, STRONG STOCKS – After trading at a 20+ year high on September 27, 2022, the US Dollar Index declined -10.7% through January 27, 2023. Since 1980, it is just the sixth time that the US Dollar Index has declined -10% or more from a 5-year high. Following the five previous 10%+ declines, the S&P 500’s median performance over the next year was a gain of -19.1% with positive returns all five times (source: Bloomberg, Bespoke Investment Group, MFS).
WHIPLASH – Since the S&P 500 bear market (defined as a -20% or worse decline without a +20% or better rally in between) began on January 3, 2022, there have been three separate rallies of +10% or more. Of the 14 prior post-WWII bear markets, only one other (10/9/2007 to 11/20/2008) had as many countertrend rallies (Source: Bespoke Investment Group, MFS).
BLUE SCREEN OF DEATH – Shipments of personal computers in the fourth quarter of 2022 declined -28.5% from the fourth quarter of 2021 in what was the largest quarterly decline in at least 25 years. For all of 2022, shipments of PCs declined -16.2%, the largest annual decline since Gartner started tracking the data in the mid-1990s. Perhaps it shouldn’t have been a surprise Thursday evening when Intel, one of the oldest and largest computer chip manufacturers in the world, announced possibly their worst quarter in history with revenues down -28% year-over-year (YoY), gross margins down -12.1% YoY, and earnings down -92% YoY (source: Gartner, MFS, Bloomberg).
This Week in History
GOLD RUSH – On January 24, 1848, James Marshall, a carpenter and sawmill operator, found gold at Sutter’s Mill near Coloma, California. Then nine days later the Mexican-American War ended, formally transferring California to the United States. Thus began the California Gold Rush, an economic boom that attracted an estimated 300,000 people to the then sparsely populated state. The “forty-niners” that rushed to the state in the year after increased San Francisco’s population from 1,000 in 1848 to 25,000 by December 1849 (Source: Bespoke Investment Group, The Wall Street Journal).
Asset Class Performance
The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.