February 1, 2023
Rockbridge Institutional – January 2023 Market Review
Stocks continued to climb in January, with small company and non-domestic stocks earning between 8% and 10% leading the way. Domestic large cap stocks (S&P 500) returned 6% for the month somewhat less than other markets, which is a change from recent history. A globally diversified stock portfolio was up 8% for the month and 14% over the trailing quarter. International developed markets and emerging markets were up 8% this month and 19% over the trailing quarter reflecting to some extent the decline in the value of the dollar. These recent numbers demonstrate the benefits of diversification to non-domestic markets.
Except for an up-tick in one-month maturities, short-term bond yields did not move much in January. Yields on longer maturing bonds (beyond two-years), on the other hand, fell a bit resulting in positive returns. An index of U.S. Treasury securities maturing in 1 – 3 years returned 0.7% in January; the 3 – 5-year index earned 1.7%. Over the trailing 90 days, the shorter-term index posted a 1.8% return; longer-term index returned 3.6%. These results are significantly better than what we experience the past twelve months.
Inflation as measured by changes in the Consumer Price Index was flat for the month and trailing quarter. Over the training twelve months the change was 5.7%, well below 8.7% we saw in March 2022. The spread between 5-year nominal and inflation-adjust yields, a reasonable measure expected inflation over the period, is 2.3% – not far from the Fed’s goal.
A “Soft Landing”?
Since January 2022 the Fed Funds rate increased from 0.25% to 4.5% reflecting the Fed’s effort to dampen inflation. The goal is to do this without a significant economic slowdown that often accompanies interest rate hikes. Markets are forward looking. While surprises could be lurking, generally market signals anticipate a “soft landing” – stocks are up, bond yields look reasonable, and labor markets are robust for now.
Signals from stock markets are positive. Last quarter and this month stock returns are up with relatively low volatility. While these markets can change quickly, current prices do not reflect a significant downturn.
Bond market signals are mixed. Current bond yields are constant at 4.7% over the next year but decline to 3.7% at five years. This downward shape of the Yield Curve can be a predictor of recessions as it suggests a future need for the Fed to reduce interest rates to spur growth. Yet, expected future interest rates (roughly 3%) implied by today’s pattern of yields do not anticipate a need for massive changes in monetary policy.
Current signals from the labor market are positive. Unemployment levels and rates are about where they were prior to the Pandemic and much anecdotal evidence suggests difficulty in hiring. While the current spate of announced layoffs in large Tech companies is unsettling, labor markets do not seem poised for a sharp recession.
While there is always room for uncertainty, current signals from stock markets, bond markets and labor markets point to any future recession being reasonably mild – a “soft landing”.