- January was a “risk-on” month with both stocks and bonds starting 2023 strong.
- The US economy is expected to slow in 2023 as large corporations have begun to lay off their excess labor supply.
- International markets saw a strong month with the expectation of increased consumer spending as China comes out of lockdowns.
After a tumultuous 2022 where stocks and bonds lost double digits, 2023 opened with a bang in risk assets. On the hopes that the Federal Reserve will soon be done raising interest rates as inflation data is cooling, investors moved into risk assets in a big way. The S&P500 gained 6.28% while the tech-heavy NASDAQ soared 10.67%. The worst sectors of the 2022 market saw the biggest gains. The communications services sector (+14.5%), which includes companies like Google, Facebook, and Disney was the worst sector of the S&P500 as it lost 39.9% last year. Consumer discretionary stocks (Amazon, Tesla, Home Depot etc.) were the best performers of the month, snapping back from a 37% loss in 2022 to a 15% gain in January. The market seems to be betting that inflation is under control and the looming economic recession may be mild or avoided.
Bond yields fell in January as investors prepare for the next several Federal Reserve meetings. The decrease in bond yields pushed the Bloomberg Barclays Aggregate Bond Index to return 3.08% during the month after falling 13% last year. Company layoffs have become a common headline as corporations prepare for a slowdown. Leaner companies are a biproduct of the difficult periods of an economic cycle. Higher unemployment rates typically accompany recessions, so the layoffs were not unexpected. Cheap debt allowed corporations to spend in many areas as opposed to their best ideas.
International markets gained around 8% during the month. Mexican stocks were the best performer, up 17% on increased tourism. As the Chinese economy begins to re-open, Merrill Lynch expects “revenge spending” where couped up citizens spend heavily on durable goods, travel and leisure. The ongoing conflict in the Ukraine should keep energy markets concerned, but the recent drop in energy prices has been a boost for consumers and businesses across the globe.
2023 will most likely be another volatile year in the stock market as the economy and spending slow. Whether we end up in a recession is still up for debate, but the hope is that any correction is short-lived. It is unclear if we have reached the bottom of the stock market just yet (stocks tend to turn around before the economy does). Bonds could do well this year if the Fed gets inflation under control without further significant interest rate hikes and a deep recession is avoided. Long-term investors should continue to focus on portfolio diversification.
Sources: Morningstar Direct, Wall Street Journal, First Trust, Merrill Lynch