Investors saw nice gains to start 2023 as both domestic and international stocks rose. Global small-cap stocks, in particular, stood out posting an increase of 9.3% for the month. Bond investors had reason to smile, too. The Bloomberg U.S. Aggregate Bond Index increased by 3.1%, an impressive January for bonds.
Bolstered by yet another encouraging inflation report, investors are feeling more optimism of late. The most recent consumer price index report, for example, showed year-over-year inflation at 6.5%. It also marked the sixth consecutive month this number has declined. Pulling the monthly change in consumer prices into focus, there was actually a slight amount of deflation. With the Federal Reserve’s rate hikes seemingly having their intended effect, investors now expect that future interest rate increases will be more muted.
We proposed last month that investors have started to look beyond the Fed and shift their attention to corporate earnings and the economy. With the quarterly earnings season in full swing, January delivered additional data for investors to digest. While only about a third of S&P 500 companies have reported results, nearly 70% of them reported better-than-expected earnings. Well-known firms such as AMD, Exxon, McDonalds, Microsoft, and United Parcel Service beat their Wall Street earnings estimates. The fourth quarter U.S. GDP report also bolstered investor optimism. Clients may recall a political debate surrounding a “technical recession” after two negative GDP reports during the first half of 2022. The strong economic finish to 2022, however, seems to have put that debate to rest. The economy grew at an inflation-adjusted rate of 2.1% for the full 2022 calendar year.
Higher interest rates and energy costs still constitute reasons to be measured about a strong January. Even so, we rate the current corporate and economic data as fairly positive. Especially if demand remains robust in the face of interest rate and energy cost headwinds, we may yet get the elusive soft landing the Fed has aspired to. That would be remarkable. But even failing that, the continued strength in the U.S. labor market along with resilient corporate profits will provide a useful buffer.
We will continue to monitor evolving conditions. If we can be of service, please do not hesitate to let us know.