Monthly Market Summary
- The S&P 500 Index returned +6.3% in January, underperforming the Russell 2000 Index’s +9.8% return. 2022’s underperforming sectors were the top performers in January, while defensive sectors posted negative returns.
- Corporate investment grade bonds generated a +5.2% total return, outperforming corporate high yield bonds’ +3.7% total return. The positive bond returns occurred as Treasury yields declined across most of the yield curve.
- International stocks outperformed for a third consecutive month as the U.S. dollar weakened. The MSCI EAFE Index of developed market stocks returned +9.0%, in line with the MSCI Emerging Market Index’s +9.1% return.
Fourth Quarter GDP Growth Slows but Remains Positive
The U.S. economy grew at a +2.9% annual rate in the fourth quarter of 2022, down from the third quarter’s +3.2% annual rate. The growth was largely driven by a resilient consumer, inventory restocking, and increased government spending, while businesses cut back their spending on equipment and the housing market remained weak. While GDP growth was positive for a second consecutive quarter, the pace of economic growth slowed as the year ended. The U.S. economy grew +1% year-over-year compared to the same quarter a year ago, a slowdown from the +5.7% year-over-year growth rate recorded in the fourth quarter of 2021.
The slowdown signals a return to a more normal pace of growth after 2021’s strong growth. Looking ahead to 2023, the U.S. economy is forecasted to slow as the cumulative effect of higher interest rates takes hold. Economists are concerned the Federal Reserve’s efforts to curb inflation could trigger further spending cutbacks and job losses and tip the U.S. into a recession.
Financial Conditions Loosen in Anticipation of 2023 Interest Rate Cuts
Financial conditions, which refer to the ease and cost of obtaining capital, loosened in January. The catalyst was the market’s anticipation of possible interest rate cuts in late 2023 due to a slowdown in economic activity. Treasury yields declined, corporate bond spreads tightened, and mortgage rates declined another -0.40%. Lower stock and bond market volatility, which reduces the level of perceived risk and encourages more investment activity, added to the loosening of financial conditions.
The Federal Reserve has expressed concern about the potential for loose financial conditions to undercut its efforts to bring inflation down. When financial conditions are loose, people are more willing to take risks and borrow money, which can lead to higher spending and demand for goods and services. This increased demand could drive up prices, keeping inflation elevated and forcing the Federal Reserve to tighten further. Policymakers will keep a close eye on financial conditions as 2023 progresses.
Important Notices & Disclaimer
The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.
The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.
The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results. Investing involves risk, including the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.
No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.
READERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.
PFG Private Wealth Management, LLC is a registered investment advisor.