Highlights
- The S&P 500 rose by 6.28% in the month of January, while non-US stocks, represented by the MSCI EAFE index, rose by 8.1%.
- Bonds were also up for the month with the Bloomberg US Aggregate Index rising by 3.08%.
- Inflation was 6.4% in December, as measured by the year-over-year percent change in the Consumer Price Index (CPI). This marks the sixth consecutive month that the inflation measure has shown a decline and is down from a peak of 9% in June of 2022.
- The US economy added 517,000 jobs in the month of January with the unemployment rate declining to 3.4%.
Economic Update
Real GDP released for the fourth quarter showed that the US economy grew by a 2.9% annualized rate. While this was down from the third quarter’s advance of 3.2%, the headline rate still came in above the expectations of most economists. For the full calendar year, the economy expanded a tepid 1.0%, which includes contractions in the first two quarters of the year. Drilling down a bit on the most recent quarter, approximately half of the gain resulted from an increase in inventories, which is likely to slow in future periods as those are worked down once again. Consumer spending was also softer than expected and residential investment (home building) declined at a 26.7% annualized rate in the quarter.
The January employment report surprised to the upside. The number of jobs added and the headline unemployment rate both came in stronger than expected. The 517,000 increase in payrolls exceed the consensus estimate of 188,000 and comes on top of positive revisions to prior months of 71,000. The headline unemployment rate of 3.4% is the lowest since May 1969.
Stocks & bonds both rallied to begin 2023
January was a good month for both equity and fixed income returns. All the major equity benchmarks finished in positive territory, ranging from +2.93% for the Dow Jones Industrial Average to +10.73% for the NASDAQ composite. For the most part, the more an index declined in 2022, the more it rose in the month of January.
The laggards-to-leaders trade was also evident at the sector level. Consumer Discretionary, Communication Services and Tech, which were the worst three sectors in 2022, were among the best-performing areas in January. Utilities, Health Care, and Consumer Staples, all considered more defensive sectors, lagged during the month.
Following one of the most brutal calendar years in several decades, the bond market was more hospitable to investors to start 2023. Interest rates continued to moderate at the longer end of the curve, which has acted as a tailwind to bond returns. The major bond indexes saw modest gains for the month.
January Effect or January barometer?
The “January Effect” refers to the notion that stock prices tend to rise more in January than in any other month, and that smaller companies tend to outperform large companies during the first month of the year. Another version of the January Effect hypothesizes that stocks that suffered the largest losses in the previous year recover in the first weeks of a new year as buyers step-in to reestablish positions in the names that were sold to harvest tax losses.
This appears to have been the case in the first month of 2023 as the Russell 2000 (small-caps) outperformed the S&P 500 (large-caps). The NASDAQ Composite, which was the worst performing benchmark in 2022, had the best return for the month. At the individual stock level, 9 of the 10 best performing stocks in January also underperformed the S&P 500 over the past 12 months, according to Goldman Sachs.
The January barometer, on the other hand, is a theory that was popularized by the Stock Trader’s Almanac and claims that “as January goes, so goes the full year.” According to Standard and Poor’s, this has historically held true 71% of the time. However, the stock market exhibits an upward bias over time as it is, with stocks finishing higher in all but 18 of the 77 years since 1945, so the predictive power of the January barometer would seem less meaningful in this context.
Regardless of the January Effect or the January barometer, our long-term preference remains in favor of owning stocks, either directly or through ETFs and/or mutual funds and looking beyond the day-to-day and month-to-month fluctuations. Time in the market is ultimately our best friend. Quoting Pitt, “It became clear many years ago that embarrassment looked good on us and being fully invested to each client’s asset allocation at all times was worth the grief. This behavior provides a well thought out cushion against the negative volatility that occurs 30% of the time. More importantly, it offers a generous exposure to the upside potential we expect to experience 70% of the time.”
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