Capital Market Impact

Markets start the year strong on soft-landing hopes

January 09, 2023
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  • Equity markets began the year on a strong note, with the S&P 500® Index rallying more than 1% due to a strong rally Friday following the payroll report. The complexion of the week mirrored what we saw in late 2022, with leadership in value, small caps, and international. The MSCI EAFE Index gained 4% and MSCI Emerging Markets Index jumped 6%. Bond yields dropped on rising hopes for a soft landing, with the 10-year Treasury yield dropping 0.32% to 3.56% through Friday, with the Bloomberg US Aggregate Bond Index outperforming the S&P 500 for the first week of the year.
  • 2022 was a historically painful period for investors, with near-universal pain among various asset classes. Since 1950, this was the third-worst return for a 60/40 portfolio (-16%), eclipsed by only 2008 (-20%) and 1974 (-17%). This could be a positive omen, as the following year’s returns have been positive following weak years, with an 18% return for a 60/40 portfolio in 2009 and 28% in 1975. Bonds had their worst year on record dating back to 1928, with the -13% return well below the 1931 return of -9% (using a 50/50 mix of Treasury and Corporate Bonds). The Bloomberg US Aggregate Bond Index was initiated in 1975, and the previous weakest return was in 1994 at -3%.
  • Aside from Friday’s rally, we’ve seen little movement over the last month due to the lack of significant news for the market to respond to. However, with all eyes on this week’s CPI report, corporate earnings season, and next month’s Fed meeting, we expect volatility to return, though the pendulum is more likely to swing from negative to positive given near-universal levels of pessimism. Investors should avoid overreacting to large market moves, as elevated volatility is our new normal.


  • December nonfarm payrolls were 223k, better than the 203k consensus estimate, but a moderation from the 256k pace in November and 263k in October. Notable strength was seen in leisure/hospitality, healthcare, construction, and social assistance. The unemployment rate fell to 3.5% from 3.7%, equaling the lowest rate since 1969. Average hourly earnings rose 4.6% from a year ago, well below the consensus and the slowest pace in 16 months. This will mark the 21st straight month where the pace of wage gains was below inflation. There are currently 5.7 million unemployed people, well below the 10.5 million job openings per the JOLTS report, though companies have anecdotally commented that filling openings is becoming easier and wage pressures are easing. In a separate report, just 17% of small businesses indicated an intention to add workers, the lowest level in two years.
  • Macro data tell a conflicting story about the economy, with survey-based data quite pessimistic, but observational data more encouraging. It is difficult at this point to judge if survey data is more predictive of a decline or embedding excessive negativity. ISM Services at 49.6 (a reading below 50 indicates a contraction), the slowest pace since 2020. New orders were sharply lower at 45.2 versus 56.0 in November. This echoes weak PMI data, with both services and manufacturing well below the 50 threshold. Interestingly, the Atlanta Fed’s GDPNow model forecasts growth in the fourth quarter of 3.8% in the fourth quarter, which would be the fastest pace since the fourth quarter of 2021. The current consensus of economists is well below that for the fourth quarter and is negative for both the first and second quarters of 2023.
  • Fourth-quarter earnings season unofficially begins later this week, with the current consensus showing a 3% decline from a year ago, compared with a 3% gain in the third quarter and 7% in the second quarter. The fourth quarter estimate fell by over 7% since September on growing macro concerns, continued cost pressures, and the impact from the dollar. Additionally, more than 20% of the S&P 500 companies preannounced during the quarter, the highest since the beginning of the pandemic. Given the degree of uncertainty, it is likely that management teams will be cautious in their outlook for 2023. Current estimates for 2023 show growth of 5%, down from 8% in September, but many analysts predict additional negative revisions.

What to Watch

  • This week is light on data releases, though Thursday’s reading on consumer prices will be closely watched. Other important releases include consumer credit on Monday, the NFIB Small Business Index on Tuesday, and consumer sentiment on Friday.


  • This material is not a recommendation to buy or sell a financial product or to adopt an investment strategy. Investors should discuss their specific situation with their financial professional.

    S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.

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    MSCI EAFE® Index: An unmanaged, free float-adjusted, market capitalization-weighted index that is designed to measure the performance of large-cap and mid-cap stocks in developed markets as determined by MSCI; excludes the United States and Canada.

    MSCI Emerging Markets® Index: An unmanaged, free float-adjusted, market capitalization-weighted index that is designed to measure the performance of large-cap and mid-cap stocks in emerging-country markets as determined by MSCI.

    Bloomberg ​US Aggregate Bond Index: An unmanaged, market value-weighted index of U.S. dollar-denominated, investment-grade, fixed-rate, taxable debt issues, ​which ​includes Treasuries, government-related and corporate securities, mortgage-​backed ​securities (agency fixed-rate and hybrid adjustable-rate ​mortgage pass-throughs), asset-backed ​securities and commercial ​mortgage-backed ​securities (agency and non-agency).

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