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Weekly Market Update for January 13, 2023

by Jared Plotz, Director of Research

While Friday the 13th may be a soft day for some businesses, it didn’t hold the markets back. All major indices advanced, with the Dow rising over 100 points. For the week, the S&P 500 rose 2.67% and the Nasdaq finished 4.82% higher. The 10-yr Treasury yield declined 6 basis points to 3.50%.

Inflation is slowing (both readings & expectations), but labor remains tight. Inflation, as measured by the December Consumer Price Index (CPI), was squarely in line with forecasts. It further cooled to +6.5% y/y from 7.1% in November on the back of durable Goods, partially offset by the rise in Services. The economy has transitioned from buying things to doing things. But according to Fed Chair Powell, over half of the Fed’s preferred inflation measure, Core PCE, is non-housing related Services. And the majority of that is labor, which remains tight and with “hot” wage inflation.

As inflation cools, will Fed rate hikes cool as well? Many argue the Fed should – pausing to gauge the cumulative impact of last year’s aggressive tightening – and will. We know inflation is coming down, albeit at a to-be-seen magnitude and ending level, but the economy has begun to slow too. Hiring plans among businesses have been weakening dramatically, and employment trends typically follow quickly.

Going forward, market moves may be driven as much by recession risks as by inflation and interest rates. Will the economy’s landing be soft, or hard? This creates outsized scrutiny on company fourth-quarter (Q4) earnings results and 2023 guidance. Investors are expecting earnings to decline in Q4 for the first time since Q3-2020. We expect outlooks to be cautious and potentially push ’23 earnings estimates even lower, a near-term headwind to equities. We have been recommending tilting portfolio weights towards fixed income now that rates are higher. The relative attractiveness of fixed income has improved.

Earnings season kicked off Friday with the first of the big banks reporting largely good results; however outlooks for 2023 were arguably downbeat. Several banks increased their provision for credit losses, suggesting a preparation/uncertainty for tougher times ahead. One of our larger equity holdings, UnitedHealth Group, beat earnings expectations, and is positioned to maintain double-digit revenue growth in what could be an otherwise muted year for corporate earnings.

Next week we get the Producer Price Index (PPI) and then readings of manufacturing and retail activity, as well as housing. PPI is another inflation measure, but excludes most of shelter costs and imports, and then has higher exposure to medical care costs and the impact of interest rates. A couple other big banks, Goldman and Morgan Stanley, will report earnings, as will many regional players. Then Healthcare and Transportation stocks round out the docket and will give further insight into 2023 corporate outlooks.

The market, and our office, will be closed on Monday in observance of Martin Luther King Jr. Day.

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