Weekly Market Update: February 6, 2023
The inflation picture is looking better. This was reflected in a series of reports showing a moderation in December prices. It also should be noted that the core Personal Consumption Expenditures (PCE) Price Index, the gauge of inflation most closely watched by the Federal Reserve, rose 4.4% during the final month of 2022, the lowest level since October, 2021.
More-benign pricing data put downward pressure on Treasury yields in January. This led to a pick-up in sentiment for the higher-growth stocks, particularly the technology issues. Many of those companies are valued on their future cash flow potential, which when discounted back to present value at lower rates increases the intrinsic value. A higher intrinsic value, which is the measure of what an asset is worth, often increases the appeal of the company’s stock. But this may be a case of fool’s gold, as many of the technology companies, including industry behemoth Microsoft, recently hinted at tougher operating conditions ahead.
The effects of the Fed’s aggressive monetary policy tightening are now being seen in weakening economic data. True, there have been some encouraging signs, most notably a solid labor market to start 2023, and that has kept the possibility of a “soft landing” for the economy in play. However, recent declines in industrial production, retail sales, and residential construction point to difficulties ahead. Thus, we might not see the fourth-quarter annualized GDP advance of 2.9% repeated for some time. The U.S. money supply contracted late last year for the first time in 33 years, which is not an ideal backdrop for economic expansion.
The fourth-quarter earnings season has been uninspiring. There have been some notable upside earnings-per-share surprises, but the consensus estimate calls for an earnings decline of roughly 5% for S&P 500 companies. That would mark the first time the index has reported a year-over-year retreat in profits since the third quarter of 2020.
Conclusion: Will the rally to start 2023 have some near-term legs? We think that will depend on whether the approach of the Federal Reserve eases up on the monetary policy tightening front, and the economy is able to avoid a hard recession, neither of which is a certainty.