Capital Markets Respond Positively to Powell’s Dovish Stance
February 3, 2023
January was a very strong month for the capital markets, predicated on fundamental economic news and for technical reasons. The December CPI report in mid-January showed a continued moderation in inflation – at an annualized 6.5% rate, down from its peak of 9.1% in June. Fourth Quarter US GDP grew at a better than expected 2.9%. The absence of December’s tax-loss selling certainly helped January’s market performance. On the whole, January’s best performing stock market sectors were last year’s worst performing ones (e.g., consumer discretionary and communications services, which contain several large-cap technology stocks). 2022’s best performing sectors – energy and utilities – were the relative laggards in January.
In the U.S: the S&P 500 Index rallied 6.3%, the Bloomberg Aggregate Bond rallied 3.1%, and the 10-year U.S. Treasury’s yield declined to ~3.5%. The U.S. Dollar continued to weaken – contributing to outperformance in the international MSCI EAFE Index, which rose 8.1%.
Investors eagerly awaited the Federal Reserve’s February 1st meeting and interest announcement. As expected, the Fed increased short-term rates 0.25% to a 4.50-4.7% Federal Funds target rate – and indicated future increases in rates in its press release to combat inflation. During the press conference following the rate announcement, however, Chairman Jerome Powell took a notably more dovish stance about the inflation outlook than he did last August (during his hawkish Jackson Hole speech). He repeatedly mentioned disinflationary factors in the economy and appeared more confident that the Federal Reserve would hit its 2% inflation target. It is worth noting that CPI inflation in the last six months of 2022 was meaningfully lower than the inflation in the first six months of 2022; the year-over-year CPI comparisons will be easier for the first half of the year. Stock and bond markets responded positively following the Powell press conference.
As we write this piece, we are in the middle of earnings season. Earnings have been mixed – with both earnings surprises and disappointments, particularly in the technology sector. S&P 500 earnings estimates are not presently consistent with a recession. The S&P 500 trades at approximately 18x earnings estimates, slightly higher than the 25-year average of 16.7x. The inverted U.S. Treasury yield curve, which has been a very reliable recession indicator, implies a recession and future rate cuts. It is quite possible that the stock and bond markets are both looking beyond a soft-landing or small recession this year, toward better growth and lower inflation in 2024 and beyond.
As we have previously discussed, we remain confident in the long-term outlook for the public markets – even if the short-term outlook is harder to predict. Our goal is to develop long-term portfolios for our clients (consistent with their goals), as opposed to making broad predictions and dramatic decisions based on the next short-term move in the market. With bond yields still meaningfully higher than a year ago and stocks less expensive than at YE 2021, we expect traditional public market portfolios to offer attractive returns over the next five years. We also believe that opportunities will arise to take advantage of private market turmoil, which generally lags public markets by a few quarters. We are particularly partial to investing through alternative strategies that can participate in secondary market opportunities (buying alternatives, generally at a discount to fair value, from investors who want or need to sell their alternative investments).
We encourage you to connect with your advisor on any questions regarding the markets, your portfolio, or other investment opportunities.