January 2023 Market Update

Data Dashboard

Stock Market

The S&P 500 finished the month up +6.28%, while both international developed and emerging markets notched gains at a rate of +8.12% and +9.68% respectively. The US Consumer Discretionary sector had a massive month, up +15.13%, while the Utilities sector had the worst performance, down -2%. Equity investors showed some skittishness during the middle of January in anticipation of market relevant economic reports. After of a slew of reports showing decreasing inflation and concerns of the delayed effects of monetary policy, investors were listening for a pivot to dovish tones in the Federal Reserve meeting. Markets seemed to get what they wished for and rallied to start off February on a positive note.

In addition, many S&P 500 companies reported/are reporting earnings this week. META (formally Facebook) shared a big earnings beat, which rocketed the stock price over 20% after hours. Investors are looking to see if companies can maintain earnings growth in an environment with many headwinds. The resiliency of the corporate sector will determine how quickly we see equity markets begin the next bull market.

January Monthly Returns (by US Sector)

Bond Market

Although shorter term yields have risen during the past month, we have seen longer term rates drop off, and as a result, bonds have produced a positive return to start the year (both US and international aggregate bonds notched a return greater than +3%). Throughout January, the yield curve deepened its inversion with the two-year and ten-year spread increasing to almost 70 bps. Since February began, the inversion increased even more to almost 80 bps, nearing its year-long high of 84 bps. January’s resilient economic data reports created questions about how soon the Federal Reserve might actually pause its rate hikes. As a result, shorter-term Treasuries sold off sharply, causing the 2-yr note yield to rise around 35 basis points (to 4.47%). The Federal Funds futures market is now pricing in the possibility of a third 25 basis point rate hike this year. However, this inversion could be indicative of a troubling economic future and the expectation that interest rates will need to be cut to stimulate aggregate demand further down the road.

Economics

During January, there was a bit of caution ahead of several incoming market-moving data releases, including the CPI, PPI, Jobs and Employment numbers, as well the Employment Cost Index.

• Inflation numbers (Headline CPI) came in exactly as expected, with MoM at -0.1%.

• PPI final demand came in lower than expected at -0.5% MoM vs. -0.1%.

• JOLTS Job openings were larger than expected and unemployment claims came in lower than expected.

• The Employment Cost Index came in softer than expected at 1% vs. 1.1%.

The worse than expected Consumer Confidence and PMI (Purchasing Managers' Index that shows prevailing direction of economic trends) mixed with decreasing costs across the board gave investors hope of a more dovish direction from the Federal Reserve in their Feb 1st meeting.

If costs are steadily coming down, why must the Federal Reserve continue its course of further interest rate hikes? Chairman Powell has said he recognizes that inflation has “eased somewhat” but that there is “still more work to do”. When asked about the possibility of pausing hikes, Chairman Powell said if costs continue to come down and economic data changes, they will adjust their monetary policy as needed. Notably, Chairman Powell did highlight some initial signs of disinflation, and did not discount loosening financial conditions if the data and economic environment called for it. Most importantly, he reiterated there is a path to lower inflation to its target rate of 2% without substantial increases in unemployment or economic decline. This gave investors much hope that there might be light at the end of the tunnel in regard to a seemingly endless series of rate hikes.

Tactical Updates

For our Tactical Equity ETF portfolios, we had a relatively low frequency trade month. We rotated in and out of Aerospace & Defense and Copper mining companies during the month of January, realizing a net gain. We end the month with exposure largely similar to the beginning except for the swap from Mexico equities to Hong Kong equities. As for Tactical Equity Stocks, our sector concentration at the end of the month was primarily in Consumer Discretionary, Materials, and Industrials.

As for Tactical Fixed Income portfolios, we turned over the entire portfolio this month, rotating out of corporates and into emerging markets debt and mortgage-backed securities. We changed instruments, but remained invested in short-term and floating rate bonds as well.

General Client Considerations

IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) are increasing in 2023. Changing your elections at the start of the year can help you to spread out contributions evenly and ultimately maximize your tax advantaged retirement saving. In 2023, the contribution rate for these accounts is $22,500. This is an increase from the 2022 limit of $20,500.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has increased from $6,500 to $7,500 in 2023. That means individuals who were born in 1973 or earlier can contribute up to $30,000 to these accounts. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

With regard to IRAs and ROTH IRAs, the IRS changed the contribution limit from $6,000 to $6,500, and left the catch-up contribution at $1,000.

As we downshift from the holiday season, many of you likely have a list of To Do’s for 2023 including doctor’s appointments and organizational tasks. We suggest you add financial checkup to the list and encourage you to setup some time with us to review your financial plan. We look forward to hearing from you!

Thanks,

The Friedenthal Financial Team

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