January 2023 Market Review

Fidelity Bank – Wealth Management
January 2023
William J. Fennie III, CFA

After a dismal 2022 for stock and bond investors, US equities jumped off to their best January since 2019 with S&P 500 rising by 6.28%. Optimism on diminishing Fed rate hikes (as of writing 2/1, the Fed raised rates by 0.25%) and potential soft landing for the economy propelled the index higher. Bond investors also welcomed the calendar change. The expectations for slower Fed rate hikes and potential rate cuts later in the year helped boost the Bloomberg US Aggregate Bond Index by 3.08%. This represents the best January for the index since 1988.

Economy

January’s real GDP release showed the US economy expanded at higher than expected 2.9% annual rate in the 4th quarter of 2022. Overall, for 2022, real GDP expanded by 2.1%. US GDP is now more than $26.1 Trillion. Many cheered this data as a positive sign of a potential soft economic landing in this interest rate hiking cycle. According to Bloomberg surveys, the median estimate is a 65% probability recession in the next 12 months. Diving deeper into the report, consumer spending grew 2.1%, failing to meet forecasts of 2.7%. This suggests that inflation (CPI 6.45% YOY) is stretching consumers’ wallets thin. As the largest factor in the GDP calculation, soft consumer spending poses a difficult headwind for economic expansion.

Adding to consumer spending anxieties is the 15.40% annualized (data through 11/22) increase in revolving consumer debt in 2022. That is the largest percentage increase since 2006 when revolving credit grew by more than 19%.

Source: Federal Reserve, Bloomburg, LP.

Equity 

Expectations of lower, slower Fed hikes and possible cuts led to a boost in 2022’s laggards. Growth Stocks, which declined more than 29% in 2022, jumped out of the gate in January, gaining 8.33%, while Value Stocks, which outperformed significantly in 2022, only gained 5.18%. Small Caps gained broadly with the Russell 2000 index up 9.75%. With the market rally that began in the fourth quarter of 2022, US value stocks have outperformed US growth stocks by about 7.50% since 9/30/22.

Non-U.S. equities, both developed and emerging, had another strong month. The MSCI EAFE gained 8.10% and the MSCI EM Index gained 7.90%, both in US dollar terms. Since late September 2022 the dollar has weakened substantially and is now down more than 10.80% from that peak. This dollar weakness has enhanced returns for US investors in international developed markets and emerging markets. Since 9/30/22, the MSCI EAFE has returned 26.84% in US dollar terms but that return shrinks to 15.57% in local currency terms; same goes for emerging markets: 18.37% in US dollars but only 13.55% in local currency.

Source: Bloomberg, LP.

Fixed Income 

U.S. investment grade bonds rose by 3.08% in January. Expectations of slower interest rate increases improved fixed income investor confidence and pushed rates lower. The 10-Year Treasury Yield fell from 3.88% to 3.50% in January. Investment grade corporate bonds were among the best performing asset class as contracting yields boosted the asset class by 4.01%.

Again, a weakening US dollar helped US investors in emerging market local currency bonds. The asset class jumped 4.44% as the US dollar sank 1.38% in January.

As the Federal Reserve ended its belief in ephemeral inflation, it raised Fed Funds rate from a lower bound of 0% at the start of 2022 a lower bound of 4.50% by 2/1/23. This dramatic rise in rates has certainly been painful for fixed income investors, but it has provided significant increases in yield on a go forward basis. The Bloomberg US Aggregate Bond Index now yields 4.30% versus only 2.11% one year ago.

Source: Federal Reserve, Bloomberg, LP.

Real Assets 

Commodities were a mixed bag in January. The broad-based Bloomberg Commodity Index fell 0.49%. The spot price of gold rose 6.52% while the industrial metals copper and aluminum rose 10.16% and 11.19%, respectively. Consumers got a welcomed surprise in January as natural gas prices plunged 34%. This decline should help ease pressure on many consumers’ tight budgets as home heating costs should fall. Since its peak in August of 2022 at $9.68/MMBtu, natural gas prices have now fallen more than 72% to $2.68/MMBtu.

Source: Federal Reserve, Bloomberg, LP.

January 2023 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 1/31/2023. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.

Fidelity Bank Wealth Management
101 N. Blakely St.
Dunmore, PA 18512
www.bankatfidelity.com
1-800-388-4380