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.