Monthly Market Update - February 2023

January Highlights:

  • S&P 500 Index up 6.3%
  • International equity indices up 8%
  • Bloomberg Aggregate Bond Index up 3.1%
  • Q4 GDP +2.9%
  • Fed Funds rate up another 0.25% (Feb 1 announcement) to 4.5-4.75% range
  • Retail sales, industrial production, leading economic indicators such as ISM index falling

Stock and bond markets raced higher in January, ignoring the adage “don’t fight the Fed.” Despite the Fed’s resolve to continue hiking the fed funds rate towards five percent, the fixed income markets continued to push yields lower across intermediate and long-term maturities, with the five-year Treasury yield falling 50 basis points and the ten-year yield falling nearly 50 basis points during the month. Intermediate and long-term rates finished January almost a full percentage point lower from their October peaks, indicating the bond market believes the economy is at a turning point despite Chairman Powell’s continued hawkish rhetoric.

January’s stock market rally was led by some of the big tech names whose stock prices had declined dramatically in 2022. The more stable, value-oriented large-cap companies in the Russell 1000 Defensive Index rose by less than half of the S&P 500’s gains -- a result also seen in the Dow Jones Industrial Average. While the Consumer Discretionary and Communication Services Sectors were up double digits for the month, Consumer Staples, Utilities, and Health Care were flat or negative.

Despite the Fed’s commitment to putting a brake on the economy, the fourth quarter of 2022 was notable for the continued resilience of the job market and still robust if slackening consumer strength. Housing continued to weaken in the face of steep mortgage rates, but this sharp downtrend did not infect the broader economy. The preliminary Q4 GDP numbers showed a healthy, above-trend annualized growth rate of 2.9%, but under closer examination, the number was less impressive than the headline, with inventory build-up contributing to about half of the increase.

While we are far from the Fed’s target of 2% inflation, the latest data suggest a move in the right direction as consumer prices (CPI) fell from 7.1% to 6.5% year-over-year, while core inflation dropped from 6.0% to 5.7%. Falling inflation also appears to be spurring a renewed optimism in consumers, with consumer sentiment showing a surprising positive jump in January.

Elsewhere, the Fed’s determination to dampen demand in the effort to control inflation was showing some traction, with a slight dip in retail sales and a third straight month of declining industrial production.

Turning to beyond the United States, international equities continued a dramatic resurgence that started in October. The MSCI EAFE international index is now up over 27% since the end of September. China, in particular, has witnessed renewed optimism due to the regime’s reversal of its zero Covid policy, finally allowing the world’s second-largest economy to re-open. Because of the renewed resurgence of international equities during Q4 and throughout January, we completed a Q&A with Mr. Thomas Tibbles, Portfolio Manager on Madison’s International Equity team.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

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Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice.

Equity risk is the risk that securities held by the fund will fluctuate in value due to general market or economic conditions, perceptions regarding the industries in which the issuers of securities held by the fund participate, and the particular circumstances and performance of particular companies whose securities the fund holds. In addition, while broad market measures of common stocks have historically generated higher average returns than fixed income securities, common stocks have also experienced significantly more volatility in those returns.

Investing in foreign markets involves additional risks, including exchange rate changes, political and economic unrest, relatively low market liquidity and the potential difference in financial and accounting controls and standards. The portfolio may invest in small, mid-sized, or emerging companies, which are susceptible to greater risk than is customarily associated with investing in more established companies. The portfolio may invest in high yield or lower-rated securities, which may provide greater returns but are subject to greater-than average risk.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The ISM Manufacturing Index is an indicator of the level of economic activity in the manufacturing sector in the United States. A number above 50 indicates an expansion of U.S. manufacturing, while a number below 50 indicates a contraction.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The S&P 500® Index is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

The S&P Midcap 400 is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 89% of the total market capitalization of the Russell 3000 Index.

The Russell 1000® Growth Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit growth characteristics.

The Russell 1000® Value Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit value characteristics.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.

The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap® Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership.

Russell Defensive Indexes® measure the performance of companies that have relatively stable business conditions
which are less sensitive to economic cycles, credit cycles and market volatility based on their stability indicators.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

International Equities Definitions
The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excluding the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

The MSCI EAFE (Europe, Australasia & Far East) Index is a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada.

Emerging Markets - MSCI Emerging Market Index – captures large and mid cap representation across 24 Emerging Markets (EM) countries. With 1,138 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

China - MSCI China Index - captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

Japan - MSCI Japan Index - is designed to measure the performance of the large and mid cap segments of the Japanese market.

Germany - MSCI Germany Index - is designed to measure the performance of the large and mid cap segments of the German market.

United Kingdom - MSCI United Kingdom Index - is designed to measure the performance of the large and mid cap segments of the UK market.

India - MSCI India Index - is designed to measure the performance of the large and mid cap segments of the Indian market.

Fixed Income Definitions
Government Bond - Bloomberg US Government Index - measures the performance of the U.S. Treasury and U.S. Agency Indices, including Treasuries and U.S. agency debentures. It is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index.

Municipal - Bloomberg U.S. Municipal Index - covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

U.S. Aggregate Bond - Bloomberg U.S. Aggregate Bond Index - is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage backed securities, asset-backed securities and corporate securities, with maturities greater than one year.

Investment Grade Corporate - Bloomberg U.S. Credit Index - measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.

High Yield - Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

Weighted Avg. Market Cap: measures the size of the companies in which the portfolio invests. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its price per share.

Price-to-Earnings (P/E) Ratio: measures how expensive a stock is. It is calculated by the weighted average of a stock’s current price divided by the company’s earnings per share of stock in a portfolio.

Dividend Yield: the portfolio’s weighted average of the underlying portfolio holdings and not the yield of the portfolio.

A basis point is one hundredth of a percent.