Market Update: January 18, 2023
Photo by Ari Gardinier on Unsplash
Economic data for the week included consumer price inflation that continued to decelerate to close out 2022, but still remains high. Other positive news included jobless claims falling back and an improvement in consumer sentiment.
Equities fared well globally last week to continue a winning streak in the new year, thanks to lower inflation and optimism over the current earnings season. Bond prices rose along with falling interest rates. Commodities also gained, helped by a weaker U.S. dollar and stronger crude oil prices.
U.S. stocks were led higher by an improved CPI inflation reading, as well as optimism over Q4 earnings. Gains were led by traditional ‘growth’ sectors last week, at a pace of 4-5% in consumer discretionary, technology, and communications. Lagging were defensive sectors such as consumer staples, which was the only loser for the week. Real estate also gained over 4% last week, as interest rates fell back.
The U.S. Treasury Department warned that the national debt limit will be officially reached this coming week, although accounting and payment reshuffling (included under what are known as ‘extraordinary measures’) will be implemented to kick the can until summer, when such measures are no longer feasible. Naturally, Treasury Secretary Yellen is imploring Congress to act now, well in advance of another last-minute crisis, but these events have remained a persistent source of political consternation. Based on recent episodes, political negotiations needed to raise the limit could be contentious, with some wanting the debt limit abolished altogether (noting that it applies to due payments already committed through prior passed legislation), while others are in favor of a prioritization scheme to formally pay bondholders first, while pushing transfer payments, such as welfare and food stamps, to the back of the line. Of course, the ultimate problem to avoid is the default of U.S. treasury debt, which, depending on how a default is defined, could be disastrous to financial markets. (Treasuries are considered to be the ultimate ‘risk-free’ asset, implying a default is unthinkable, and tends to not be a priced-in factor for valuations.) Unfortunately, the 2011 political episode that came very close to the deadline resulted in a downgrade of U.S. debt by Standard & Poor’s from AAA to AA+, based not on a problem with ‘ability to pay’ but less confidence in ‘willingness to pay’. Unfortunately, a permanent solution has yet to emerge, and some degree of financial market volatility has been a common result in the interim.
The Q4 earnings season has begun for U.S. equities, with decent results from the big banks that usually report first, although a more pessimistic tone about the economy and preparations for potential credit losses in the event of recession turned sentiment lower. FactSet estimates a potential net decline of -3.9% for Q4 in total, in contrast to an expected gain just a few weeks back. However, initial estimates at quarter-end have tended to run low, compared to realized earnings after all have reported. With expected declines for Q1 and Q2 as well, earnings remain a key wildcard in 2023, as to whether equities have priced in an earnings recession in addition to, or instead of, an economic recession. On the optimistic side, estimates for Q3 and Q4 2023 show high-single digit recovery at this point, placing the full year in a net positive light.
Foreign stocks performed in line with U.S. equities, with Europe and Japan outperforming, although all segments ended positively. Economic data included indications of a milder slowdown than first expected, including positive GDP growth in the U.K., and stable employment, which elevated spirits. In EM, demonstrations in Brazil played a far less important negative role than the positive impact of stronger budgetary discipline.
Bonds fared positively as interest rates fell back along the yield curve, along with lower inflation; corporates outperformed treasuries slightly as spreads narrowed. A fall of -2% in the value of the dollar pushed foreign bonds higher, in both developed and emerging markets.
Commodities rose on the week, led by gains in energy and industrial metals, with lesser gains for precious metals and agriculture. Crude oil rose over 8% on the week to just under $80/barrel, due to rising orders from China in keeping with reopening plans. This offset a similar magnitude decline natural gas, as warmer winter weather continued to weigh on perceived demand. In fact, spot prices are down -50% over the past month, following strong price spikes during the past year at various times—both in keeping with gas being one of the most volatile commodity contracts.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.