Market & Economic Update: Foggy Weather

From 2009 to 2013, we frequently drove from Bethesda to various locations near Davidson College in North Carolina to watch Natalie compete in cross country and track meets. I estimate we made trips to the south no less than 50-60 times over her four-year collegiate career. There were countless great memories from those trips; one that still makes me laugh is how quickly our dogs learned certain exit ramps meant they were minutes away from a meal being magically handed to them through a drive-thru window. The drive to Davidson was fairly easy; however, depending on when we left, we would occasionally hit a dense blanket of fog on 77 South near Fancy Gap, North Carolina. Despite the signs cautioning drivers of the impending fog, as we approached Fancy Gap, the fog always caught us off guard because it would come out of nowhere. We would go from normal visibility to less than 25 feet of visibility in a matter of seconds. The dense fog forced me to hit the brakes hard, and even at 25 mph, it was nerve-racking driving with such limited visibility. This drive down 77 South feels familiar to the economic and market landscape we have been navigating for the past 13-14 months. Thankfully, the fog has been showing signs of clearing on the global economy, but in terms of the Federal Reserve’s and Chairman Jay Powell’s rate actions and the state of inflation, it’s impossible to know if we will face another tough patch of fog down the road.

In our market commentaries from last year, we summarized the main issues challenging the global economy as high inflation, high interest rates (high borrowing costs), China’s mismanagement of all things COVID, a fractured supply chain, and the war in Ukraine. The concerns for 2023 have shifted some, but many of the concerns and unstable circumstances remain the same. Let’s dive into three of the main issues still shaping the economic and financial outlook for 2023.

1. Inflation has cooled considerably, though it remains stubbornly high in rents, wages, and food. However, there is no question that it has been moving in the right direction, despite a higher than forecasted inflation reading for January. The Federal Reserve’s antidote for high inflation is high interest rates. The Prime Rate was 3.25% on March 16, 2022, and today, it sits at 7.75%, a number that will likely head higher in the coming months. Personally, I think the Fed needs to pause future hikes until it provides enough time for its previous hikes to take effect so we can learn the genuine efficacy of the hikes we have already experienced. Otherwise, I believe the Fed risks driving the economy into a deeper than desired slowdown. When we look back at this period in a few years, I question if economists will conclude the excessive hikes contributed to the inflationary environment.

2. There has been good news out of China, as China’s government has done a complete about-face with its zero-COVID policy and reopened its economy, which has been a huge boost to the global supply chain. While problems remain in parts of the supply chain, the lead time from factories is close to average historical levels, and the price of durable goods has been dropping, both being promising signs the global supply chain is normalizing.

3. The wild card remains Putin and the now one-year-old war in Ukraine. If the war in Ukraine escalates, then I expect the markets to reflect the uncertainty a larger scale war will bring to the global economy.

Overall, things are trending in the right direction, but we need to remain patient. At some point, this post-pandemic era of too much stimulus and high inflation will become a distant memory. When that does happen, the Federal Reserve will once again be forced to lower interest rates to stimulate the economy.

With that thought in mind, I wanted to share a few highlights that have caught my eyes in recent articles and newsletters…

“Good Starts for the S&P – With a gain of 8.5% in the first 25 trading days of 2023 (through 2/7/23), the S&P 500 had its sixth best start to a year since 1953 when the current five-day trading week began. Over this 70-year period, there have been 16 other years where the S&P 500 rallied 5% or more in the first 25 trading days of a year, and the median rest-of-year performance was a gain of 17.6% with gains 15 out of 16 times. The only exception was 1987 when the S&P 500 started the year with a gain of 16.1% and traded down 12.1% for the rest of the year.” (Source: Bespoke Calculations)

“Even Better for the Nasdaq – Since its first full year of trading in 1972, the Nasdaq's 15.7% gain in this year's first 25 trading days ranks as the third best behind 1975 (+18.8%) and 1987 (+16.3%). In the 20 prior years that the Nasdaq rallied 5%+ in the first 25 trading days of a year, the index's median rest-of-year move was a gain of 11.9% with gains 85% of the time (17 out of 20). For all other years, the Nasdaq's median rest-of-year move was a gain of 6.5% with positive returns 66% of the time.” (Source: Bespoke Calculations)

“What About Europe? – Europe's benchmark STOXX 600 rallied 8.4% in the first 25 trading days of 2023 (through 2023/2/3), which was its third best start to a year since 1987. In the seven prior years when the index was up 5%+ over the first 25 trading days, its median performance for the remainder of the year was a gain of 10.1% with gains 71% of the time. In all other years, the median rest-of-year performance was a gain of 7.7% with positive returns 59% of the time.” (Source: Bespoke Calculations)

“Bulls on the Move – The weekly survey of investor sentiment from the American Association of Individual Investors (AAII) showed that 37% of respondents were bullish on the stock market on the survey's 2/9/23 release date. This is the first time that bullish sentiment has exceeded 35% since 11/18/21. The 57-week streak of sub-35% readings was the longest in the history of the survey and more than twice as long as the two 27-week streaks that ended on 1/31/91 and 10/15/20.” (Source: AAII)

“Not All Employment Indicators Are Positive – U.S. companies announced 102,943 job cuts in January 2023, which represents a 136% increase versus December and a 440% increase versus January 2022 according to a monthly survey from global outplacement firm Challenger, Gray & Christmas. Last month's total was the largest number of announced layoffs in the month of January since 2009. Market/Economic conditions were cited as the reason for 84% of all layoffs, and 41% of January's layoffs came from the Technology sector.” (Source: Challenger, Gray & Christmas)

“Credit card debts moving higher – TransUnion reported that total credit card balances in the U.S. hit $930 billion in the fourth quarter of 2022. This marks an 18.5% increase over Q4 of 2021 when balances were sitting at $785 billion.” (Source: TransUnion)

In summary, we have had glimpses of a market recovery as we navigate the challenges facing the global economy, but there is no way to predict when the fog will clear. Volatility remains in the shorter term; however, the longer term outlook looks more positive, with a likely path towards stability – the catch being when. 

Author: Alp Atabek

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