Review the latest monthly market update from Signature’s CIO, Scott Mitchell.
As expected, the Federal Reserve raised the Federal Funds rate by 25 bps in early February, the smallest increase since the beginning of the rate hike cycle. The market saw this as positive, with the S&P 500 rallying despite Chairman Powell hinting that a couple more rate hikes from here may be necessary. The market seems to be ignoring that hint for now, with expectations that the rate hike cycle is coming to an end much sooner than the Fed suggests.
The stock market continues to be resilient, with the S&P 500 up 7.3% to begin the year. Despite mixed messages, where on one hand the economy appears to be weakening and companies remain cautious, the interpretation by the market seems to be telling a much different story. The S&P 500 broke above its recent downtrend, leading to the belief that 2023 will be a positive year if the adage “as goes January, so goes the year” holds true.
The current scenario is being referred to as a “Goldilocks” situation, with moderating inflation, a strong job market, and the expectation that the Fed is nearing the end of the rate hike cycle. There is increasing hope that a potential recession will be mild and short-lived. As stocks tend to precede economic movements by six months, the market is currently betting on positive outcomes.
However, I believe that the quickly shifting economic backdrop favors stocks to remain in a range. Longer-term, I do think that many stocks present attractive opportunities for investors. If you have cash on the sidelines, I suggest patience. Buy favored stocks over time (dollar cost average), refrain from chasing the rallies, and use the weak periods as opportunities to invest.
From a sector standpoint, the more defensive sectors are seeing their fundamentals hold up better on a relative basis, as expected during economic uncertainty. Oddly enough, though, their stock prices are NOT holding up, creating an interesting dichotomy between fundamentals and price. In the short-run, prices and fundamentals can get mismatched, as many of us remember from the real estate bubble in 2006. However, over time, prices and fundamentals usually converge. So, there seem to be two likely outcomes: 1.) that the stock prices have it figured it correctly, and that corporate and economic fundamentals have not been reflected or 2.) the fundamentals are correct, and that stock prices haven’t adjusted. I suspect that for many sectors, especially the ones that have gotten off to fast starts in 2023, that the latter is true, and that those stock prices will fall to reflect the fundamentals.
This year, the conversation will shift from being mainly “inflation and interest rate” centered to being “corporate earnings per share” centered. Overall, throughout earnings season, company comments on the earnings outlook have continued to steer increasingly cautious. This leads me to believe that caution is the best approach for stock investors, too.
I have repeatedly said that I do not believe we are in a recession, but that one is coming. I’ll admit that the chance of avoiding a recession, the so-called “soft landing,” is increasing. Think of it like weather forecasting – we can assign probabilities, but not certainties. While I still believe a recession is the likely outcome, recent “shifts in the wind” have lessened its probability. Perhaps the storm is still coming, but we may be able to avoid a direct hit.
If you have questions about these or other financial matters, please don’t hesitate to call your advisor. If you know someone else who would benefit from any of this information, please don’t hesitate to share it with them. Or, you can ask us to reach out to them if that is more comfortable.
The stock market will be closed for Presidents Day on February 20. Also, 1099’s will be mailed beginning in mid-February. As always, amended and delayed 1099’s may be mailed as late as March 15. So, while you might not be able to file until you get those, we recommend using the next couple of months to prepare all of your other tax paperwork.