Market Commentary 03/07/23

Based on January economic data and fourth-quarter data revisions, the U.S. economy appears to be in a stronger position than economists forecasted. Job growth was robust in January as U.S. employers added 517,000 jobs, well above the average 291,000 jobs added each month in the fourth quarter. *Consumer spending also exceeded expectations in January, with retail sales rising 3% month-over-month after two consecutive monthly declines to end 2022. Manufacturing output, as measured by industrial production, was unchanged in January after contracting in the final two months of 2022. Investors will want to see confirmation of recent strength in the coming months, but it increasingly appears unlikely that a recession will begin this quarter.*

Similarly, January’s data may support the Federal Reserve’s case to maintain a tighter policy stance for longer, thereby eliminating previous market expectations for the central bank to stop raising interest rates in the first half of 2023. There are two potential investment implications. First, the Federal Reserve may keep interest rates higher for longer, which could mean higher interest income for savers. Second, a longer period of restrictive monetary policy could have a more significant adverse impact on the economy and result in slower economic growth in the coming quarters and years.

Comments on Fourth Quarter 2022 Earnings

We are firm believers that, in the long run, stocks are driven by the strength of the economy, where a valid barometer is individual corporate earnings. As of the end of February, most of the S&P 500 companies have reported fourth quarter earnings. Overall, earnings for the quarter came in slightly lower than expected as economic uncertainty weighed heavily on individual and corporate consumers.

The technology sector, in particular, experienced disappointing results, with several large tech companies failing to meet consensus earnings expectations. Some of the largest companies reported declines in both their revenues and earnings as customer demand weakened, and many companies announced sizable layoffs (contradicting the strong jobs numbers discussed above). In contrast, the financial sector had a strong fourth quarter, with banks and other financial institutions reporting better than expected results. However, we did see many of the larger banks increase their estimates for loan losses.

In our view, the data indicates earnings momentum may be fading in the face of persistent macro headwinds, including the Federal Reserve’s interest rate increases and rising input costs. As we have discussed before, the debate between a hard, soft or no landing for the economy continues. The Fed has continually maintained its desire to lower inflation and we will remain on watch for how this impacts the economy and your investments.