Updated February 3, 2023
Our investment team remains committed to sharing regular updates and market insights to keep you informed. Please look for our next update on February 17.
Blowout Jobs Report
Today’s monthly employment report showed a stunning 517,000 jobs added during January. This was 330,000 more than estimated and double the previous month. The unemployment rate hit 3.4 percent, the lowest monthly reading since 1969. The labor market has notably strengthened over the last six to eight weeks. The number of job openings in the economy grew to more than 11 million in December, a second straight monthly increase. Even with a number of large layoff announcements, especially in the tech sector, weekly initial jobless claims have been declining since mid-November.
While it seems counterintuitive given the strength of the labor markets, average hourly earnings have continued to fall, down .4 percent to 4.4 percent year-over-year. This is good news from an inflation perspective. We do expect labor markets to soften this year as the economy slows.
Fed Slows Pace of Rate Hikes
Following the Federal Reserve Open Market Committee meeting this week, the Fed raised interest rates .25 percent on Wednesday. Over the last year, the Fed has increased its benchmark federal funds rates from near zero to a range between 4.5 percent and 4.75 percent, the highest level since 2007. For the second straight meeting, the Fed slowed its pace of rate hikes. They increased rates .5 percent in December after raising rates .75 percent in the four previous meetings.
In his post meeting press conference, Chairman Jerome Powell indicated that additional rate hikes were likely. Markets continue to predict another .25 percent increase at the committee’s next meeting in March. However, there was a noticeable difference in tone during the press conference. Powell acknowledged the process of “disinflation” in certain areas of the economy and that inflation has “eased somewhat but remains elevated.”
We have mentioned in previous updates that we expect inflation to continue to fall this year. The Fed has stated that once they pause rate hikes they will keep rates high for an extended period of time, likely well into next year or longer. However, history has shown that following a peak in Fed rate hikes, it only takes nine months on average until they begin to cut rates. Markets appear to be betting on history, not what Fed officials are saying.
Good Start to the Year for Markets
Both stock and bond markets are off to a strong start to the year. The S&P 500 is up 7.5 percent year-to-date. We have seen a reversal from last year, when the value-oriented Dow Jones Industrial Average outperformed and the growth-oriented NASDAQ significantly underperformed the S&P 500. So far this year, the Dow is up only 2.2 percent, while the NASDAQ is up more than 14.75 percent.
Bond markets are also off to a strong start as they continue to recover from last year’s historic sell-off. The benchmark Bloomberg U.S. Aggregate Bond Index is up 3.8 percent and the ICE Bank of America U.S. High Yield Index is up 4.27 percent. While we welcome the strong start for markets so far this year, we remain cautious. Markets seem to be predicting a soft landing for the economy and that the Fed will start to cut interest rates toward the end of the year. Any loss of confidence in this scenario will lead to volatility in markets. We continue to expect that both stock and bond markets will have a positive year, but it’s almost never a straight line higher.
Fourth-Quarter Earnings Season
This marks the busiest week for fourth-quarter earnings releases with 111 S&P 500 companies (31 percent by market value) announcing earnings. At the end of the day, we do expect S&P 500 earnings to be slightly lower year-over-year for the quarter. So far, as expected, earnings have been muted. There have been notable positive surprises from a diverse group of companies, including ExxonMobil, Mastercard and Meta (formerly Facebook). However, some other bellwether names, such as Apple, Alphabet (Google) and Starbucks reported somewhat disappointing results. Many companies have announced aggressive cost-cutting measures that should bode well for upcoming quarters.
What Should I Be Doing With My Investments?
We encourage you to pay attention to the latest developments, but not to lose sight of your long-term investment strategy. Reach out to our investment team to discuss your options and reaffirm your timeline and goals. Call our investment team at (518) 415-4401.