January 2023 In Review

A review of stock markets in the U.S. and almost all of the world jumped in January, in stark contrast to December, giving investors worldwide hope that 2023 might be a good year.

In fact, the large-cap S&P 500 finished January near 4,077, which was its best monthly gain since October and its best January since 2019. NASDAQ rose more than 10% on the month, recording its best January since 2001 and its best monthly performance since July.

Consistent with U.S. markets, performance in developed markets outside the U.S. was great, too – as all of the 38 developed markets tracked by MSCI were very positive, with 5 seeing double-digit gains for the month. Performance in the emerging markets tracked by MSCI was also almost all positive, as 44 of those 46 indices advanced in January.

For the month of January:

• The DJIA advanced by 2.8%;
• The S&P 500 gained 6.2%;
• NASDAQ leaped 10.7%; and
• The Russell 2000 jumped 10.4%.

The themes that drove market performance in December were many, although hopes that better inflation data would turn into a trend so that the Fed might slow its pace and magnitude of rate hikes was constantly present on Wall Street’s collective mind. And while inflation remained stubbornly high as readings of the CPI and the PPI did, in fact, improve, expectations remained that the Fed would increase rates at its next meeting in February, for its 8th rate hike since the beginning of last year.

In addition, volatility, as measured by the VIX, decreased markedly in January, beginning the month just shy of 23 and ending the month just below 20.

Further, West Texas Intermediate crude rose about $1 in January, although the trend was mostly up, after touching $73/barrel in early January and ending the month just under $80.

Market Performance Around the World

Investors looking outside the U.S. saw great performance also, as all 38 developed markets tracked by MSCI advanced in January – and five jumped by more than 10%.

Performance for emerging markets was almost universally positive, with 44 of the 46 indices positive for the month, with 9 moving up by more than 10%.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Was Mostly Good

For the month of January, performance was mostly positive, with 8 of the 11 S&P 500 sectors gaining ground. Interestingly, January was almost the mirror-opposite of December, which saw 9 of the 11 retreat.

In addition, for January, the range in sector returns was very wide, with the Consumer Discretionary sector jumping almost 15% and the Utilities and the Health Care sectors losing more than 2% on the month.

And if you look carefully, investors will notice that last month's best performing sector (Utilities) was this month's worst performer, and last month's worst performer (Consumer Discretionary) was this month's best performer. That's volatility.

Here are the sector returns for the month of January 2023 and December 2022 (two very short time periods):

Source: FMR

GDP Up 2.9% in 4th Quarter

The Bureau of Economic Analysis Real reported that our Gross Domestic Product increased at an annual rate of 2.9% in the fourth quarter of 2022. In the third quarter, real GDP increased 3.2%.

"The increase in real GDP reflected increases in private inventory investment, consumer spending, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and exports. Imports, which are a subtraction in the calculation of GDP, decreased.

The increase in private inventory investment was led by manufacturing (mainly petroleum and coal products as well as chemicals) as well as mining, utilities, and construction industries (led by utilities). The increase in consumer spending reflected increases in both services and goods. Within services, the increase was led by health care, housing and utilities, and "other" services (notably, personal care services). Within goods, the leading contributor was motor vehicles and parts. Within federal government spending, the increase was led by nondefense spending. The increase in state and local government spending primarily reflected an increase in compensation of state and local government employees. Within nonresidential fixed investment, an increase in intellectual property products was partly offset by a decrease in equipment.

Within residential fixed investment, the leading contributors to the decrease were new single-family construction as well as brokers' commissions. Within exports, a decrease in goods (led by nondurable goods excluding petroleum) was partly offset by an increase in services (led by travel as well as transport). Within imports, the decrease primarily reflected a decrease in goods (led by durable consumer goods)."

Retail Sales Drop

The U.S. Census Bureau announced that retail and food services sales for December 2022 were $677.1 billion, down 1.1% from the previous month but up 6.0% above December 2021.

• Total sales for the 12 months of 2022 were up 9.2% from 2021.
• Total sales for October 2022 through December 2022 were up 6.7% from the same period a year ago.
• The October 2022 to November 2022 percent change was revised from down 0.6% to down 1.0%.

In addition:

• Retail trade sales were down 1.2% from November 2022 but up 5.2% above last year.
• Nonstore retailers were up 13.7% from December 2021.
• Food services and drinking places were up 12.1% from last year.

Producer Price Index (Inflation) Falls

The U.S. Bureau of Labor Statistics reported that the Producer Price Index for final demand declined by 0.5% in December. For perspective, final demand prices advanced 0.2% in November and 0.4% in October. Further, the index for final demand increased by 6.2% in 2022 after rising by 10.0% in 2021.

In December, the decrease in the final demand index can be attributed to a 1.6% decline in prices for final demand goods. In contrast, the index for final demand services rose 0.1%.

Final Demand

Final demand goods: Prices for final demand goods moved down 1.6% in December, the largest decrease since falling 1.8% in July. Leading the December decline, the index for final demand energy dropped 7.9%. Prices for final demand foods decreased by 1.2%.

Conversely, the index for final demand goods less foods and energy advanced by 0.2%.

Product detail goods: Nearly half of the December decrease in the index for final demand goods can be traced to a 13.4-percent decline in prices for gasoline. The indexes for diesel fuel; jet fuel; fresh and dry vegetables; canned, cooked, smoked, or prepared poultry; and basic organic chemicals also fell.

In contrast, prices for carbon steel scrap increased by 8.3%. The indexes for chicken eggs and electric power also moved higher.

Final demand services: Prices for final demand services increased by 0.1% in December after rising by 0.2% in November. The December increase can be traced to margins for final demand trade services, which advanced by 0.3%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Conversely, the index for final demand transportation and warehousing services fell 0.2%, while prices for final demand services less trade, transportation, and warehousing were unchanged.

Product detail services: A major factor in the December price increase for final demand services was a 17.6% jump in margins for fuels and lubricants retailing. The indexes for deposit services (partial), airline passenger services, inpatient care, and professional and commercial equipment wholesaling also increased. In contrast, prices for truck transportation of freight decreased by 1.7%. The indexes for residential real estate loans (partial), machinery and vehicle wholesaling, and guestroom rental also fell.

Leading Indicators Signaling Recession

On January 23rd, the Conference Board announced that its Leading Economic Index for the U.S. decreased by 1.0% in December 2022 to 110.5 (2016=100), following a decline of 1.1% in November. The LEI is now down 4.2% over the six-month period between June and December 2022 – a much steeper rate of decline than its 1.9% contraction over the previous six-month period (December 2021–June 2022).

"The US LEI fell sharply again in December – continuing to signal recession for the US economy in the near term. There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead.

Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust. Nonetheless, industrial production – also a component of the CEI – fell for the third straight month.

Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023."

The trajectory of the US LEI continues to signal a recession

Earnings, Earnings, Earnings

Research firm FactSet compiled a Q4 Earnings Summary and on Friday reported that:

• For Q4 2022 (with 29% of S&P 500 companies reporting actual results), 69% of S&P 500 companies have reported a positive EPS surprise and 60% of S&P 500 companies have reported a positive revenue surprise.
• For Q4 2022, the blended earnings decline for the S&P 500 is -5.0%. If -5.0% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decline in earnings since Q3 2020 (-5.7%).
• On December 31, the estimated earnings decline for Q4 2022 was -3.2%. Seven sectors are reporting lower earnings today (compared to December 31) due to downward revisions to EPS estimates and negative EPS surprises.
• For Q1 2023, 17 S&P 500 companies have issued negative EPS guidance and 2 S&P 500 companies have issued positive EPS guidance.
• The forward 12-month P/E ratio for the S&P 500 is 17.8. This P/E ratio is below the 5-year average (18.5) but above the 10-year average (17.2).

Hopes for a Good 2023

According to the famous Stock Trader's Almanac-saying: "as goes January, so goes the year."

As proof, since World War II, if the market gains ground in the month of January, it has continued to rise in the remaining 11 months of the year more than 85% of the time, and the average gain is 11.5 %.

Want more reason to hope?

The last occurrence was in 2019 when the January gain was 7.9%, and the return for the year was 28.9%.