January 2023 Stock Market Commentary
Ethan Pollard | February 03 2023
Financial markets rallied in January as investors hope to put 2022 behind them and move on to greener pastures.
The S&P 500, a broad benchmark for large cap US stocks, gained +6% in the first month of trading after losing -18% in 2022.
Overseas equities continued their recovery, with the MSCI ACWI ex-US index gaining +8% in January for a +20% return over the last three months.
Within fixed income, the Bloomberg US Aggregate Bond index jumped +3% as it looks to recover from its worst year on record. Commodity prices, the big winner of 2022, fell -0.5% in the first month of the new year.
Our proprietary Three Dials outlook begins this year unchanged, as we summarize below:
- Market Sentiment and Momentum: (Neutral ➖)
We continue to see signs of technical strength across the major equity indexes, with January’s gains an important step to building on the rebound from last October’s lows.
The coming months will be crucial to restoring confidence in equity markets, as bearish sentiment remains above long-term averages with many still skeptical of the current recovery. For now, our Momentum indicator remains Neutral.
- Economic Fundamentals: (Negative ➖)
We continue to see a slowdown in industrial output as domestic manufacturing firms account for moderating economic activity, which resulted in consumer confidence falling in January after improving for most of the back half of last year.
While we continue to believe that the robust labor market offers glimmers of hope, leading economic indicators remain weak enough that our Fundamental Dial stays Negative through month-end.
- Valuation: (Neutral ➖)
Valuations were largely unchanged in January, with stock prices rallying on lower long-term interest rates. After years of zero interest rate policy, investors now have the luxury of weighing higher yielding bonds versus the potential upside to stock investments.
To date, stocks remain fairly valued in our view, thus leaving our Valuation Dial in Neutral.
One month into the new year, we continue to take a Slightly Defensive approach, with two dials showing a Neutral position while one dial remains fully Off.
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