Weekly Market Update: January 30, 2023
The stock market rallied at the start of 2023. True, there have been some speed bumps in the form of weak economic data, but the decline in Treasury market yields and the value of the U.S. dollar versus a basket of foreign currencies gave a boost to equities.
Moderating inflation data have been well received on Wall Street. Indeed, declines in both the December Consumer and Producer Price Indexes, down 0.1% and 0.5%, respectively, brought a positive reaction. The Street also is not onboard with the notion that the Federal Reserve will push the benchmark short-term interest rate markedly above 5.00% and keep it there for an extended period. The spread between the Fed’s 2023 federal funds target and the Wall Street consensus recently stood at about 0.75%. Wall Street’s less hawkish interest-rate outlook is helping the higher-growth stocks. (Note that the central bank was scheduled to hold its February monetary policy meeting shortly after this report went to press.)
The U.S. economy is weakening, despite a still solid labor market. We think this is factoring into Wall Street’s view that the central bank, despite still hawkish commentary from its monetary policy voting members, will soon pause on the rate-hike front. Both retail sales and industrial production fell sharply in December, which is not overly surprising given the recent contraction in manufacturing and nonmanufacturing (services) activity. The continued inversion of the Treasury yield curve and the recent readings on the leading economic indicators portend a recession.
Fourth-quarter earnings season, which got off to a mixed start, also is expected to reflect the effect of tighter monetary policies. The consensus is calling for a mid-single-digit decline in profits for the S&P 500 companies. Our sense is that the profit expectations for the first half also will be revised lower in the coming months, as the health of the consumer weakens. Shoppers are burning through excess savings, increasing their credit card balances, and facing higher rates on their debt obligations.
Conclusion: The recent retreat in Treasury market yields is giving a boost to equities. However, many of the near-term headwinds remain in place, suggesting that 2023 may be an up-and-down year for stocks.