Weekly Market Report: February 3, 2023

Markets had plenty of news to process last week between central bank policy moves, a heavy dose of corporate earnings, and a very busy economic calendar. Equity markets posted another weekly gain in what has been somewhat of a soft landing/goldilocks-feeling start to the year for both stocks and bonds. The FOMC met expectations with a 25 bps hike but a very strong jobs report on Friday poured a little cold water on a relatively dovish sounding Fed. Markets are weathering the back end of a tightening campaign, a challenging earnings season, and seemingly ever growing geopolitical tensions across both ponds. The S&P 500 returned 1.6%, outpacing both developed (-0.25%) and emerging (-3.36%) markets. Commodities lost 5.6% thanks to softness across the energy complex while interest rates moved higher most notably in the 2 yr
 to 5 yr portion of the curve.

Market Anecdotes

  • The FOMC delivered the expected 25 bps rate hike, taking the upper bound to 4.75%. The post meeting statement was received as somewhat dovish while still jawboning markets not to expect rate relief this year as they seek more evidence of tamed inflation.
  • Perhaps one of the data points that kept the good news jobs report from being outright bad policy news is average hourly earnings growth of 4.4% is the lowest rate since August 2021, but the surge in payrolls sent both rates and equity market volatility higher.

  • Fed Funds futures rate expectations are pricing in another 25bps at the March 22nd meeting and a coin toss of whether there will be any more hikes at the May 3rd meeting or beyond.

  • Bianco Research noted that with a Fed focused on taming inflation and government pandemic assistance ended, YoY money supply (M2) as of 12/31/22 actually declined by 1.3%, the first time this has occurred since 1938.

  • Halfway through 4Q earnings season and results have moved steadily lower with blended top and bottom lines of 4.3% and -5.3% respectively. Earnings beat rates (70%) and beat margins (0.6%) are coming in lower than historical averages.

  • The technical backdrop of the U.S. market looks more encouraging today with the market having broken out above its downtrend and its 200 dma while posting higher highs and higher lows.

  • With a far greater percentage of S&P 500 companies now carrying fixed rate debt, the surge in rates ought to have a more delayed and measured impact on debt service costs. The same cannot be said however for borrowers in syndicated and middle market direct lending areas.

  • Favorable equity market trends so far in 2023 include European markets, small caps, multinationals with high percentages of foreign sales, and last year’s losers (low quality stocks) in what might be considered a dash for trash.

  • An interesting phenomenon since the beginning of the pandemic is that retail trade volume as a percentage of overall trade volume has increased from consistently around 8% to approximately 12% with some spikes as high as 20%.

Economic Release Highlights

  • January payrolls surged 571,000 with upward revisions of 71,000 to prior months. The Household survey showed a gain of +894,000 and the unemployment rate declining to 3.4% while labor force participation improved to 62.4%.

  • Average Hourly Earnings of 0.3% MOM and 4.4% YOY were in line with forecasts. The BLS Employment Cost Index rose 1% in December.

  • The JOLT Survey registered 11.01mm job openings, an increase of 5.48% over November.

  • The U of M Consumer Confidence reading in January improved notably from 59.7 to 64.9 with improvements across

    headline, current conditions, and future expectations measures.

  • January ISM Manufacturing Index softened slightly to 47.4 while ISM Services surged from 49.2 to 55.2

  • Case-Shiller Home Price Index in November rose 6.78% YOY.

This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.
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