Markets roared back to life in January in the face of continued pressure from tightening monetary conditions. After a series of treacherous whipsaws in 2022, investors are feeling particularly cagey as markets extend upward. Nevertheless, as markets continue to recover, the FSA investment team is following a prudent course of action to shift the portfolios from cash to a more invested position.
TThe enthusiastic start to the year impacted all areas of the markets, from micro-caps to mega-caps. Eight of the eleven S&P 500 sectors and every single bond index clocked positive gains for the month.
Leading the way up was the Nasdaq, which might be expected after an extended losing streak in 2022 (-33% on the year). The two highest valued stocks in the Nasdaq Composite, Apple and Microsoft, make up about 25% of the composite’s weighting. It’s been years since their share prices and P/E ratios were suppressed for such a long time.
The recent rebound in big tech feels a bit like watching the market trying to pick up pennies in front of a steamroller. Last year, the only refuge for investors was the energy sector; however, in January, all of last year’s best performers were among the weakest sectors, including energy, along with defensive areas such as consumer staples, health care, and utilities.
We haven’t seen high growth stocks this active since last summer’s bear market rally. These trends don’t always make sense, but investments are priced based on future expectations of cash flows and economic growth. The New York Fed predicts a 57% chance of recession by January 2024. While this strikes fear in the heart of any normal person watching CNBC, a recession can be interpreted as bullish by those assuming interest rates will be cut drastically to fend off an impending slump.
Twenty twenty two was a severe reversal from 2021 and became one of the worst bear markets of our lifetime. Stocks and bonds moved together in a way most investors had never seen, with bonds plunging further than any year on record. It’s not an easy time to be bullish.
The U.S. has endured mixed economic data of late but was recently surprised on the upside with the lowest unemployment figure since 1969 (see chart below). Meanwhile, inflation remains square in the Fed’s crosshairs as they fight to reclaim their 2% annual target rate. Headline inflation is down from its June peak of 9.1% yet persists at an elevated 6.5%. One thing hasn’t changed at the start of 2023: All eyes remain on the Fed.
We will continue to increase stock and bond allocations if the price trends of these assets improve. The investment team is always in search of promising pockets of the market and has added foreign stocks, precious metals, and high-quality dividend stock funds to the appropriate strategies. Some of our more defensive holdings are now under pressure. These will be sold as they trigger the FSA Safety Nets®. Fortunately, with money market yields over 4% in some funds, money markets are now a source of positive returns.
Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.
Jordan Daugherty, CFA
Investment Analyst
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