Monthly Market Recap: January 2023

“New year, new you” is one of my favorite phrases to say tongue-in-cheek this time of year.  We all know how it goes: millions make lofty goals entering the new year that rarely come to fruition.  Whether that’s learning a new language, losing weight, or reaching a savings goal, January tends to be a month when people are hyper-focused on achieving these objectives.

However, as the year rolls on and reality sets in, it’s fair to say that these goals often fail to materialize.  This says a lot about human nature – the tendency to go “all in” for a short period of time, swept up by feelings of optimism and motivation, and then quickly losing interest when reality sits in.

What we saw in markets this January is an interesting parallel to this type of behavior. 2022 was a very rough year for markets and investors are looking to shake off that beating and move on.  However, despite strong performance from both stock and bond markets so far and rising optimism of a “soft landing,” it’s important to keep a rational mindset and avoid being swept up by the recent euphoria.

1. Both stocks and bonds had an excellent January

Stock markets and bond markets both had positive performance in January.  This strong rebound from an abysmal 2022 was driven by optimism around the Fed’s posturing that rates would continue to increase, but at a slower pace than what we saw in 2022.

Looking at monthly data back to 2000 (277 months), US bond markets had their 4th best month, and the S&P 500 had its 23rd best month in January.  Stocks and bonds could certainly continue to perform this well, but there are still economic headwinds that could derail performance.

2. Markets expect the Fed will raise and then lower rates before year-end

The Fed Funds Futures market is an indicator of how markets are thinking about the path of the Fed’s policy rate.  Looking forward to the remaining meetings this year, investors are expecting the Fed to reach their stated policy rate of 5 – 5.25% in May. Markets are also expecting a higher chance of that rate moving lower as we approach the end of the year.  

A higher expected rate implies the Fed will continue to pump the brakes on the economy, while a lower rate is typically seen as tailwind to economic activity.  This is consistent with how markets are feeling about the probability of a “soft landing” meaning markets expect the Fed will reach its target rate, achieve their goal of cooling inflation, and then gradually bring the rate down to a lower long-term target rate so as not to keep their policy too restrictive.

3. Labor and inflation

Labor remains very tight with unemployment at only 3.4% and the January Bureau of Labor Statistics report showing Nonfarm Payrolls increasing 517,000 month-over-month, well above market projections.  Normally, this report would be extremely good news, but markets are showing concern because low unemployment and high demand for labor could create continued upward wage pressures, which could increase inflation.

Speaking of inflation, it appears as though we are at an inflection point where inflation has started to come down from highs in Summer 2022.  However, there is concern about the “stickiness” of this inflation, meaning how long inflation will persist.  The Atlanta Fed has an indicator called the Sticky-Price CPI, which is meant to track a basket of items that change price slowly and could be a better predictor of future inflation than the better-known CPI and Core-CPI figures that are widely reported.

Although the traditional CPI figures have moved lower, Sticky-Price CPI remains elevated. The Fed has mentioned using similar measures to get a deeper understanding of inflation and what sectors are most affected.  It’ll be interesting to see how this plays out in rate decisions moving forward.

2023 started off on a better foot than 2022 and there are reasons to be optimistic about the global economic outlook.  Bond yields have stabilized, labor markets remain strong, and there is clearer insight into the end of this rising rate environment.  

However, markets are not in the clear – honestly, they never are. In addition to uncertainties around inflation and how corporate earnings will be impacted by the Fed’s actions, there has been a considerable increase in tensions between NATO and Russia and the US and China. Any one of these concerns can tip the scale positively or negatively for the global economy.

Just like a new year’s resolution, you are more likely to have a successful financial plan if you:

1) Build a plan you can stick with

2) Take wins and setbacks in stride and

3) Focus on your big picture goals, even when things are tough.

Happy 2023!

‍Disclaimer:

Past performance is no guarantee of future results. Allinvesting is subject to risk, including the possible loss of money you invest.Fluctuations in financial markets could cause declines in the values of youraccount. There is no guarantee that any particular asset allocation will meetyour objectives.

Past performance does not guarantee future results, whichmay vary. The indices are unmanaged and the figures for the Index reflect their investmentof dividends, but do not include any deduction for fees, expenses or taxes.

Summit Financial, LLC. is a SEC Registered InvestmentAdviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel.973-285-3600. It is provided for your information and guidance and is notintended as specific advice and does not constitute an offer to sell securities.Summit is an investment adviser and offers asset management and financialplanning services. Indices cannot be invested into directly. Data in this reportis obtained from sources which we, and our suppliers, believe to be reliable,but we do not warrant or guarantee the timeliness or accuracy of thisinformation. Consult your financial professional before making any investmentdecision.  Diversification/assetallocation does not ensure a profit or guarantee against a loss. The S&P 500Index is a market capitalization-weighted Index of 500 widely held stocks oftenused as a proxy for the U.S. stock market. The Bloomberg Aggregate Bond Indexis a broad-based benchmark that measures the investment-grade, U.S.dollar-denominated, fixed-rate taxable bond market. The Consumer Price Index(CPI) is a measure of the average change over time in the prices paid by urbanconsumers for a market basket of consumer goods and services.

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