January 2023 Summary
- Cooling inflation data and China re-opening help drive equity rally in January
- Nasdaq 100 posts best monthly performance in January since 2001
- Corporate earnings in the US continue to cool off
- The yield curve in the US remains inverted
US equities made a strong comeback in January following their disappointing results from 2022. A confluence of events generated optimism amongst investors, including inflation data that suggested a soft landing for the US economy instead of an extreme recession. Moreover, a weaker dollar and loosening trade restrictions between China and other countries contributed to more favourable business conditions, further bolstered by falling energy prices and lower corporate earnings expectations.
January proved to be a profitable month for the Nasdaq Composite, with its 10.7% gain being its highest since 2001 after falling by an impressive 32% in 2022. Not only did all major indices post positive returns during January, but they are now also trading above their 200-day moving averages - typically a display of market strength that may continue into February and beyond.
On a total-return basis, the Nasdaq 100 Index and Composite gained over 10.7%, the S&P 500 returned 6.3%, Dow advanced 2.9%, and Russell 2000 rose 9.7%. Consumer Discretionary, Technology, and Communications stocks that were laggards in 2022 saw significant gains in January.
Treasuries
In January, US Treasury yields weakened across the entire curve. The yield on the benchmark US10Y Treasury has decreased to 3.51%, falling from its October peak of 4.25%. More impressively, since November, the US30Y yield has remained below 4% and is currently sitting at 3.64%. Due in part to a strong equity market run this month so far, even the US2Y have seen yields decline, with rates now standing at 4.21%. Many parts of the curve are still inverted, which has been a recession predictor in the past.
Earnings commentary
A little over a third of the S&P 500 companies have reported their Q4 profits, with an unexpected 5% decline in comparison to the 3.2% decrease initially predicted. Profits are anticipated to remain subdued for both Q1 and Q2 by around 2-3%. However, there should be some respite from mid-year onwards as earnings growth is forecasted at 3.4%, along with revenue expansion estimated at 2.6%.
Bloomberg data reveals the average beat of earnings for this quarter was 2.83%, and sales increased a positive 1.06%. The rate of growth in earnings rose to 3.70%, with Utilities driving up sales growth by 7%. Energy, Industrials and Consumer Discretionary boomed with increases at 78%, 54% and 32%, respectively, while Materials crumbled at -43%, Communications slipped -15%, and Financial dropped -13%.
Volatility
As the end of January approached, market volatility declined sharply as investors and the Federal Reserve aligned their projections for future interest rate rises. This can be seen in the CBOE Volatility Index (VIX), which dropped 11% over this period from 23.76 on January 3rd to a low of 17.97 intraday on January 27th before closing at 19 by month's end.
Oil Market
Oil prices have been on a downward trajectory for nearly eight months, with the exception of January, when it experienced an 8% surge from its early month lows. In March of 2022, WTI hit a 14-year high of $123.70; however, compared to last year's figures, oil is down 10% and overall 23% since that peak.
Gold Prices
The price of gold rose steadily over the past three months, trading to a high of nearly 7% in January before closing the month up 5.7%. However, since its peak at $2,050 in March 2022, Gold has declined by 5.9% from these levels.
US Dollar
For four months in a row, the US dollar edged lower due to speculations that central banks will reduce interest rate hikes as inflationary pressures start waning. The US Dollar Index dropped 1.35% in January and has fallen 10.5% from its September 2022 peak of $114.
Cryptocurrency Markets
Despite FTX's collapse causing ongoing uncertainty in the crypto space, volatility continues to be influenced by a range of factors. Inflationary pressures coupled with central bank policy have had an impact on prices - Bitcoin dropped over 60% in 2022; however, it rebounded at the start of 2023, rising 39% so far. These developments are mirrored across other equity markets.
The Months Ahead
On February 1st, the FOMC unveiled their target interest rate range. Investors focused on Chairman Powell's post-release interview in order to gain insight into inflation commentary, a higher for longer approach and if there is any potential for a rate reduction later this year. After the FOMC rate decision on February 1st, the January jobs report (2/3), CPI (2/14), retail sales (2/15) and producer price index (2/16). Since 1929, 80% of annual equity market returns have been positive after stock prices increased in January.