The market was off to an excellent start in 2023 as investors got more comfortable that a modest economic downturn will not lead to a recession. This is often referred to as a “soft-landing “. With inflation moderating, concerns about added aggressive rate hikes into 2023 have tempered. As expected, the Federal Reserve raised the overnight rate twenty-five basis points on February 1st to 4.625%. Some investors feel the rate will peak at 5.125% by late spring.

It is no surprise that the more interest rate sensitive sectors that underperformed last year were the best performers in January. The Nasdaq 100 posted its best January performance in over 10 years returning over 10%, after falling 32% in 2022.

The chart below details the major stock indices January 2023 returns. Column A shows the monthly return, column B, the trailing 1 year return, column C, % of the 52-week high, and column D represents the index percentage off it’s 52 week low.

Moderating inflation and a weakening economy boosted the bond market. Intermediate and long-term bonds benefited the most as yields dropped about thirty basis points. This significant drop in yield increased fixed rate bond prices between 3 and 5%.

The market appears to be playing a dangerous cat and mouse game. I do feel weaker economic news and moderating inflation will weigh on the Federal Reserve’s future rate decisions, but the committee has a dual mandate. Simply put, the Federal Reserve’s main job is to ensure prices paid by consumers are stable over time, and everyone who wants to work in the United States can find employment. The main tool in the Fed’s arsenal to balance these two mandates is monetary policy.

The graph below illustrates the market’s projection of where overnight rates will be in 2023. As you can see, rates peak in late spring. This is referred to as the “terminal rate”. What is surprising to me is how quick the market is pricing in a reduction in rates. It is difficult to envision a rate reduction in the next 12 months with a 3.4% unemployment rate.

As we mentioned in our previous newsletters, short-term volatility has little impact on long-term investment results. A well-diversified balanced portfolio is a time-tested strategy for long-term capital. This was never more evident than with the bounce back in January. This market volatility is common.

As always if you have any questions feel free to reach out.

Best,
Bob

This material contains the current opinions of the author but not necessarily those of The Guardian Life Insurance Company (Guardian), New York, NY or its subsidiaries and such opinions are subject to change without notice.

This material is intended for general public use and is for educational purposes only.  By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity.  Please contact a financial professional for guidance and information that is specific to your individual situation.  Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. The Hang Seng Index is a free float-adjusted market-capitalization-weighted stock-market index in Hong Kong. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Each company's security affects the index in proportion to its market value.  Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions Opinions expressed are those of the author and not necessarily those of Guardian or PAS. 2023-150567 Exp 2/25

Source Bloomberg,  Nasdaq