Weekly Market Update: January 9, 2023
The new year begins with questions about the U.S. economy still unanswered. Wall Street typically does not like such uncertainty; and hence the selloff in both the equity and bond markets during the final few weeks of 2022 to close out a difficult year. The volatile 12-month campaign saw the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite decline 8.8%, 19.4% and 33.1%, respectively. The technology and communication services sectors were big losers, with the rapid rise in interest rates and Treasury yields hurting the higher-growth groups.
The Federal Reserve remains the elephant in the room. Indeed, the central bank continues on its restrictive monetary policy course in an effort to slow demand and ultimately bring down prices. Federal Reserve officials, led by Chairman Jerome Powell, have indicated that the short-term benchmark interest rate, which currently stands at 4.25%-4.50%, will likely need to go above 5.00% and stay at that level for an extended period to effectively fight inflation.
Both Wall Street and Corporate America appear to be bracing for a recession in 2023. With the Fed looking intent on increasing the federal funds rate into a period of slowing economic growth, many market pundits are now starting to believe the central bank will have a harder time navigating a “soft landing” for the economy. On point, recent data have shown declines in housing market fundamentals and a sharp drop in November durable goods orders, the latter of which are goods with an expected lifetime of greater than three years.
The soon-to-commence fourth-quarter reporting season is likely to show a drop in earnings. Wall Street’s consensus calls for a low-single-digit decline in fourth- quarter profits. There also is a sense that analysts will use the upcoming earnings season to lower their earnings prognostications for the first half of this year. The reduced profits expectations may put downward pressure on valuations for S&P 500 companies.