January 2023 in Review
by Daniel Zeigler, CFP®, CMFC®, Senior Portfolio Manager
Welcome to the monthly market update from Midland Wealth Management. I am Dan Zeigler, Senior Portfolio Manager. Today I just wanted to take a few minutes to give you an update on the markets for the month of January.
Stocks have had a stellar start to 2023. The S&P 500 and Dow Jones are up about 6.2% and 2.8% in January, which marks their third positive month in four months and the best January returns in 4 years for the S&P 500. The Nasdaq Composite was up nearly 10.7% this month, after being down more than 35% in 2022 and small-cap stocks joined the rally as well, up nearly 10% for the month.
The stock market appears to be rallying in anticipation of a pause in rate hikes from the Federal Reserve, even as the Central Bank is expected to hike its benchmark rate again on Wednesday by 25 basis points or 0.25%. A new CNBC Fed Survey shows that economists and investors that the Fed’s talk about taking rates to 5% and holding them ‘higher for longer’ won’t be the case by the end of 2023. If fact, many are expecting the Federal Reserve to start cutting rates before year-end. So why would the Fed retreat? For one, inflation is coming down across multiple indicators. The latest data this week has been encouraging, from the employment cost index showing wage growth easing and the Fed’s preferred measure of inflation cooling, as well, and GDP is holding up better than expected. In fact, U.S. GDP rose 2.9% in the 4th quarter, which was more than expected. When the Fed does decide to cut interest rates, it will likely be because the economy is turning over, and maybe the stock market is getting ahead of itself.
The 4th quarter earnings for the S&P 500 continues to be in line with analyst expectations, however the growth rate is still expected to decline by about 5% compared to last year. Investors are more interested in the company’s outlook and guidance going forward. Given the latest rally in the stock market, stock valuations have moved higher, with the forward price to earnings ratio hovering around 17.8x next year’s earnings, which is above the 25-year average of about 16.7x.
The question remains, are we starting a new bull market rally or is this just another bear market bounce? It is likely too early for the bulls to claim victory, however, we are seeing stronger market breadth as the percentage of stocks above their 200-day moving averages hit a 14-month high.
The market will be digesting a lot of information this week. Over 1/3 of the S&P 500 companies will continue to report their quarterly earnings this week. Consumer confidence, ISM manufacturing numbers and a jobs reports number on Friday will provide clues into how the 1st quarter is unfolding. Most of all, investors will be paying close attention to the Federal Reserve announcement today on interest rates, as investors will be monitoring the commentary for clues into how much further the Fed intends to hike, or when it plans to cut rates.
As always, if you have any questions or want to speak to someone, please do not hesitate to give us a call. Make sure to check out our latest 2023 Market Outlook recording from last week, which can be found at midlandsb.com under the Wealth tab and then Economic and Market Updates.