Weekly Market Update – January 13, 2023

Quick Takes

• Stocks built on their gains for the year, with the major indices on pace for their best start to the year in decades. The S&P 500 gained +2.7%, the tech-heavy Nasdaq Composite was up +4.8%, and the small cap Russell 2000 advanced 5.3%. Non-U.S. developed markets and emerging markets both rose +4.2%.
• Treasury yields fell for a second straight week with the benchmark 10-year U.S. Treasury yield dropping -5 basis points (bps) to 3.50% and the 2-year UST yield falling -2 bps to 4.23%. The Bloomberg U.S. Aggregate Bond Index was up +0.9% for the week and the Bloomberg Global Aggregate Bond Index ex U.S. was up +2.8%.
• The December Consumer Price Index (CPI) was spot on with expectations, slowing to a +6.5% annual rate. It was the seventh straight month that the year-over-year rate of inflation declined, suggesting peak inflation may be behind us.

Global Markets Continue to Celebrate the New Year

The New Year’s celebration hasn’t stopped for capital markets, as investors are enjoying the best start to a year in decades. The major stock and bond indexes had solid increases for the week, building on the prior week’s gains. The S&P 500 had its best week since November, a gain of +2.7%, and is its best two-week start to the year since 1987. If the month ended now, the +4.2% year-to-date gain would be the best January since 2012. Riskier areas of the market did even better. The tech-heavy Nasdaq Composite was up +4.8% for the week and is up 5.9% in 2023. The small-cap Russell 2000 Index jumped +5.3% for the week and is up +7.1% for the year. Overseas stocks enjoyed gains too. Developed market international stocks continue to outperform their domestic counterparts, with the MSCI EAFE Index up +4.2% for the week and +7.0% for the year. Emerging market stocks gained +4.1% for the week, putting them up +7.7% in 2023.

Inflation was a primary focus during the week, with the Consumer Price Index (CPI) continuing to show inflation cooling. Additionally, consumer sentiment unexpectedly beat expectations, reaching its highest level in nine months, and contributing to the positive vibes. Both reports weren’t without some trouble spots though. In the CPI report, the core rate, which removes the more volatile food and energy components, actually rose. In the consumer sentiment report, expectations for long-term inflation also rose. And in a separate, import prices also surprised to the upside with a gain well above expectations. So, although the headlines were mostly good news on the inflation front, there remain traces of ‘sticky’ inflation that will still give the Fed concern in their campaign to stamp out inflation. Outside economic data, the Q4-2022 earnings season got rolling with several big banks reporting mixed results, including some saying they are expecting a mild recession.

Treasury yields sank further on the economic data, with the benchmark 10-year U.S. Treasury yield dropping -5 basis points over the week to close at 3.50% — that’s already down -37 basis points since the start of the year. The drop in the CPI and yields helped the Bloomberg U.S. Aggregate Bond Index gain +0.9% for the week, putting it up +2.7% in 2023. If the month ended now, that would mark the best January for U.S. bonds since 1988, and the second best January ever. Non-U.S. bonds added +2.8% for the week and are up +3.9% for the year.

Chart of the Week

The preliminary Consumer Sentiment reading for January from the University of Michigan was reported Friday, and the headline results were encouraging. Consumer Sentiment easily beat expectations, jumping o 64.6 from 59.7 in December, well ahead of expectations for an increase to 60.5 and marking its highest level in nine months. That is a noticeable gain from June when sentiment hit a record low. Both the Current Conditions portion of the index and the Consumer Expectations component of the report rose solidly. Both components have risen steadily from the June lows. One trouble spot in the report was found in the inflation expectations readings. The 1-year inflation forecast declined to 4.0% from 4.4% in December, but the 5-10-year inflation outlook increased to 3.0% from 2.9%. It’s not surprising that consumer sentiment is rebounding as gasoline prices have fallen. But with the longer-term inflation forecasts returning to 3%, matching the highest level since gasoline prices peaked in June, the Fed will be less inclined to ease off monetary policy tightening. In other words, for those looking for a “Fed pause”, which virtually all investors are, that data point was not helpful. In fact, it reinforces the Fed’s hawkishness from the New York Fed survey, released earlier in the week, showing that three-year inflation expectations are still at 3% and five-year inflation expectations rose to 2.4%.

Sentiment Heads Higher
University of Michigan Consumer Sentiment Index

Source: University of Michigan, Bloomberg, CNBC.

Economic Review

• The December Consumer Price Index (CPI) was uncannily spot on with expectations for virtually every component. Headline CPI was down -0.1% for the month and up +6.5% for the year – both matching expectations and both down from the prior month’s results of an unrevised +0.1% month-over-month increase and an unrevised +7.1% year-over-year gain. Core CPI, which strips out food and energy, rose +0.3% for the month and +5.7% year-over-year. Again, both are perfectly in line with expectations. Core CPI for December was up +0.1 percentage point from November, but down from November’s unrevised +6.0% annual gain.
• The December Import Price Index increased by +0.4% for the month, far higher than expectations for a -0.9% drop and last month’s negatively revised -0.7% decrease. Year-over-year, prices were up by +3.5%, also well ahead of expectations of +2.2% and the prior month’s unrevised annual rate of +2.7%.
• November consumer borrowing was higher than expected, as Consumer Credit came in at $27.96 billion, above expectations for $25.0 billion, but below October’s upwardly revised $29.12 billion (originally reported at $27.0 billion). Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $11.5 billion, a +3.9% increase from the prior year, while revolving debt, which includes credit cards, was up by $16.4 billion, a 16.9% year-over-year rise.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index for December declined to 89.8 from 91.9 in November. The index posted the twelfth-consecutive month below the 48-year average of 98.0. 32% of small business owners noted that inflation was their single most important problem in operating their business. The NFIB said, “Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate.”
• The weekly MBA Mortgage Application Index rose +1.2% from the prior week’s -10.3% drop as the Refinance Index rose +5.1% and the Purchase Index slipped -0.5%. The rise came as the average 30-year mortgage rate fell 16 basis points to 6.42%, which is up 2.90 percentage points versus a year ago.
• Weekly Initial Jobless Claims fell by -1,000 to 205,000 for the week ended January 7, below expectations for 215,000 and above the prior week’s upwardly revised 206,000. Continuing Claims for the week ended December 31 fell by -63,000 to 1,634,000, under expectations of 1,710,000.

The Week Ahead

The holiday-shortened economic calendar is mostly packed into Wednesday, with Producer Prices (PPI), Retail Sales, Industrial Production, Builder Confidence (NAHB Housing Market Index), as well as the Fed’s Beige Book all due. Housing data for the week also includes Building Permits, Housing Starts, and Existing Home Sales. The New York and Philly Fed regional business activity surveys are also due on Tuesday and Friday, respectively. Overseas will see Retail Sales by China and Japan, and a bevy of countries will be releasing inflation data. Q4 earnings season will kick into high gear as well.

Did You Know?

KICKING CANCER – The U.S. cancer mortality rate has dropped -33% since 1991. The American Cancer Society said that preventive measures and screening changes in the past decade impacted cancer incidence and outcomes (source: The Wall Street Journal).

TAX DELAY – Approximately 400,000 individual paper tax returns await processing by the Internal Revenue Service as of Dec. 23. Overall backlogs are high, but that is down markedly from 4.7 million unprocessed individual returns at the end of 2021 (source: The Wall Street Journal).

OUT OF OFFICE – Many of the most prominent office developers are shifting gears, looking to buy or build real estate that isn’t an office. The efforts come as the Covid-19 pandemic and the rise of remote work have reordered American habits around the workplace, dimming the importance of office towers that populate city business districts (source: The Wall Street Journal).

This Week in History

SPECIAL DELIVERY – On January 13, 1937, the first shipment of gold was received at the Fort Knox Bullion Depository, the nation’s official gold vault (source: The Wall Street Journal).

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.