Weekly Market Update – January 6, 2023

Quick Takes

• Stocks started the new year on a positive tone, snapping a four-week losing streak. The S&P 500 gained +1.5%, the tech-heavy Nasdaq Composite was up +1.0%, and the small cap Russell 2000 advanced 1.8%. Non-U.S. developed markets rose +2.7% and emerging markets +3.4%.
• Treasury yields fell with the benchmark 10-year U.S. Treasury yield dropping 32 basis points (bps) to 3.56% and the 2-year UST yield fell 18 bps to 4.25%. The Bloomberg U.S. Aggregate Bond Index was up 1.9% for the week and the Bloomberg Global Aggregate Bond Index ex U.S. was up +1.0%.
• A not-too-hot, not-too-cold December employment report helped markets rally into positive territory for the week. Nonfarm payrolls were decently positive, but the rate of growth slowed, as did wage growth. Investors cheered the data as it makes the Federal Reserve’s job in fighting inflation easier without having slow the economy too much.

Goldilocks jobs report lifts stocks to weekly gains

After one of the worst years in some time for Wall Street, 2023 began on a more positive tone, thanks largely to the highly anticipated December jobs report on Friday. Stocks closed out the first week of 2023 in rally mode after December’s employment report showed a healthy amount of hiring, but not too strong, and easing wage gains. The headline jobs number pointed to ongoing strength in the labor market and a return of the unemployment rate to a half-century low, but the report also included signs of potential softening, including slowing average hourly earnings and fewer hours worked. Investors cheered the data as it makes the Federal Reserve’s job in fighting inflation easier without having to slow the economy too much.

The S&P 500 jumped +2.3% on Friday, its best day since November 30, and turned the index positive for the week with a +1.5% gain, snapping a four-week losing streak. The tech-heavy Nasdaq Composite surged +2.6% to finish the week up +1.0% and the small cap Russell 2000 was up +2.3% Friday on the way to a +1.8% weekly gain. Meanwhile, stocks also rallied overseas on falling energy prices and China’s removal of virtually all its border restrictions, ending pandemic measures from nearly three years ago. For the week, the MSCI EAFE Index was up +2.7%, while the MSCI Emerging Markets Index gained +3.4%.

Treasury yields have continued to fall from the gains seen in 2022 that came amid the aggressive monetary policy tightening by the Fed. For the week the 2-year U.S. Treasury yield dropped -18 points to finish the week at 4.25% and the benchmark 10-year U.S. Treasury yield trimmed -32 basis points to close at 3.56%. Those yields are near the lows seen in mid-December. The drop in yields helped the Bloomberg U.S. Aggregate Bond Index gain +1.9% for the week, and non-U.S. bonds added +1.0%.

Economic releases beyond the December employment report showed ISM Manufacturing Purchasing Managers’ Index (PMI) still in contraction and the ISM Services PMI unexpectedly tumbling into contraction territory. Wednesday afternoon brought the Fed’s release of the FOMC minutes from its December policy meeting and showed the Committee members remain committed to fighting inflation, saying “a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.” In addition, officials noted that “historical experience cautioned against prematurely loosening monetary policy,” and warned against reading too much into its move to moderate its pace of increases. On the housing front, Construction Spending for November rose, beating expectations for a decline, while weekly mortgage applications plunged more than -10% from last week.

Chart of the Week

In somewhat of a “Goldilocks” report, U.S. nonfarm payrolls grew by 223,000 in December and the unemployment rate fell to 3.5%, matching a 53-year low. The 223,000 new nonfarm jobs were the lowest in two years and marked the sixth month of slowing job creation. November’s data was also revised down to 256,000 from the initially reported 263,000. The labor force participation rate increased to 62.3% from November’s unrevised 62.1% figure and was slightly higher than expectations for a slight rise to 62.2%. Average hourly earnings rose just +0.3% for the month, the lowest since February, and non-managerial pay gained just +0.2%, the slowest pace since January 2021. Year-over-year, average hourly earnings were down -4.6%. Finally, average weekly hours worked slipped to 34.3 from November’s 34.4 rate where it was expected to remain. Those aren’t terribly robust numbers to crow about, but slower job creation and tepid wage growth is what investors want to see because it makes the Fed’s task of taming inflation easier. And the report wasn’t terribly bad either, keeping alive hope that the economy can avoid a deep and protracted recession. For all of 2022, U.S. employers added 4.5 million jobs. That was the second-best year for job creation in records back to 1940 only behind the 6.7 million added in 2021 when the labor market rebounded from the pandemic-induced shutdowns.

2022 was the second-best year for job creation after 2021
U.S. nonfarm payrolls, annual change

Note: Seasonally adjusted
Source: Labor Department

Economic Review

• The December Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) remained in contraction territory (a reading below 50). The index declined to 48.4 from the prior month’s unrevised 49.0 reading, below expectations for a dip to 48.5. The manufacturing sector contracted for a second-straight month as new orders fell further below 50, and production dropped into contraction territory, while employment increased to expansion territory. Inventories grew at an accelerated pace, and supplier deliveries improved. Inflation pressures continued to ease, as the Prices Index fell to 39.4 from 43.0.
• The S&P Global U.S. Manufacturing PMI for December stayed in contraction territory (a reading below 50), remaining at the preliminary read of 46.2, in line with estimates, and compared to November’s unrevised 47.7 figure.
• The December Institute for Supply Management (ISM) Services PMI unexpectedly fell into contraction territory (a reading below 50), tumbling to 49.6 from 56.5 in November and far below expectations for a decline of 55.0, marking the lowest level since May 2020. Business activity and new orders fell, employment dropped into contraction territory, and prices declined to 67.6 from last month’s 70.0, the lowest since January 2021. The ISM said that while respondents indicated supplier deliveries improved in December, employment was contracted due to a combination of decreased hiring amid economic uncertainty and an inability to backfill open positions.
• The final read on the S&P Global U.S. Services PMI Index for December was unexpectedly revised higher but remained in contraction territory (a reading below 50). The index was revised up to 44.7, above expectations to be unrevised at the preliminary reading of 44.4 and was below November’s 46.2.
• November Factory Orders fell -1.8% for the month, nearly double the -1.0% loss expected and well below the prior month’s downwardly revised +0.4%. Durable Goods Orders—preliminarily reported two weeks ago—were unadjusted from the previously reported -2.1% decline, where it was expected to remain. November’s final read on nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—was downwardly revised to +0.1% from the +0.2% rise in the preliminary reading.
• The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, declined to 10.46 million jobs available to be filled in November, above expectations of 10.05 million, and above October’s upwardly revised 10.51 million. The report showed the hiring rate was 3.9%, down from 4.0% in October, and total separations—which includes quits, layoffs, discharges, and other separations—remained at October’s 3.8% rate. The quit rate for November increased to 2.7% from 2.6% the prior month.
• The ADP Employment Change Report for December showed private sector payrolls rose by 235,000 jobs, beating expectations of 150,000, and the prior month’s figure was revised up to 182,000. The report does not include government hiring and firing.
• November Construction Spending unexpectedly rose +0.2% for the month, above expectations of -0.4%, and October’s upwardly revised -0.2% decline. Residential spending fell -0.5% for the month, while non-residential spending increased +1.7%.
• The weekly MBA Mortgage Application Index fell -10.3% from the prior week’s -3.2% drop as the Refinance Index was down -4.4% and the Purchase Index sank -12.0%. The decline came as the average 30-year mortgage rate rose +16 basis point to 6.58%, which is up 3.25 percentage points versus a year ago.
• Weekly Initial Jobless Claims fell by -19,000 to 204,000 for the week ended December 31, in line with expectations and above the prior week’s unrevised 216,000. Continuing Claims for the week ended December 24 fell by -24,000 to 1,694,000, under expectations of 1,687,500.

The Week Ahead

Next week’s economic calendar is somewhat light but features key inflation data with Thursday’s Consumer Price Index (CPI) and Friday’s Import Price Index. The NFIB Small Business Optimism Index is also due on Tuesday and the first look at the University of Michigan’s Consumer Sentiment is on Friday. Inflation will also be prominent overseas with China, India, and Japan all reporting CPI. The kickoff of the Q4-2022 earnings season may also shape markets. Analysts expect companies in the S&P 500 to report their first year-over-year decline in quarterly earnings since the height of the Covid-19 pandemic in 2020, according to FactSet. Fourth-quarter profits are expected to drop -4.1%, a sharp contrast to the more than +31% growth a year earlier. Results this week will be from some of the country’s biggest banks, including JPMorgan Chase and Bank of America, as well as companies such as Delta Air Lines and UnitedHealth.

Did You Know?

COGNITIVE DECLINE – An early study found Eisai and Biogen’s drug Leqembi reduced levels of a sticky protein called amyloid from the brains of people with early-stage Alzheimer’s. The study is a milestone in the decades-long search for new treatments for the disease, but Doctors say Leqembi’s effects are relatively modest and far from a cure. The price per year for a typical patient rings up at $26,500. Alzheimer’s is the most common form of dementia and a leading cause of death; roughly six million people in the U.S. are thought to have it (source: The Wall Street Journal).

PUBLIC EDUCATION – Public schools lost nationwide -1.4 million students during the Covid-19 pandemic. The drop to 49.4 million children between fall 2019 and fall 2020 is a roughly -3% decline, and enrollment hasn’t recovered, according to Education Department data (source: The Wall Street Journal).

EV SALES JOLTED – 807,180 fully electric vehicles (EV) were sold in the U.S. last year. That’s 5.8% of all vehicles sold, up from 3.2% a year earlier, according to market research firm Motor Intelligence. Tesla continued to dominate, accounting for an estimated 65% of total sales, a decline from 72% in 2021, as traditional car companies rolled out more of their own EV models (source: The Wall Street Journal).

This Week in History

APPLE SEED – On January 3, 1977, Apple Computer Corp. was incorporated by Steve Jobs and Steve Wozniak. Now known as Apple, Inc., it is the only company that currently holds a $2 trillion market value. Apple first hit that market capitalization in August 2020, as the pandemic boosted sales of products for remote work and school. It briefly hit a $3 trillion valuation in January 2022. Apple shares fell more than -3% during intraday trading Tuesday, giving it a market value under $2 trillion for the first time since May, but it recovered to end the week with a $2.06 billion market cap (source: The Wall Street Journal, CNBC).

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.