Monthly Market Insights: February 2023
|Stocks rallied in January as moderating inflation, a better-than-feared earnings season, and healthy economic data put investors in a buying mood.
For the month, the Dow Jones Industrial Average rose by 2.83%, the Standard & Poor’s 500 Index jumped by 6.18%, and the Nasdaq Composite vaulted by 10.68%.1
Shift in Sentiment
The stock market opened the new year the way it ended the previous year, moving lower with high-growth names bearing the brunt of the selling.
Particularly troublesome to investors was the continued strength of the labor market, which heightened worries that the Fed would hike rates higher for longer to bring inflation to its target rate of 2.0 percent.
But market sentiment took a sharp U-turn after another cooling consumer inflation number reinforced the disinflationary trend of the last six months.
Suddenly, investors appeared to adopt a different view of the future–one characterized by continued disinflation, a rate hike cycle nearing its end, and a fading probability of a near-term recession.2
The Power of Earnings
Corporate earnings provide some much-needed support for the rally. Investors were looking for insights to gauge the state of the U.S. economy through corporate reports and the guidance that management was offering on forward earnings prospects.
As of January 27th, with 29 percent of the companies comprising the S&P 500 Index reporting, 69 percent reported earnings above Wall Street estimates, less than the five-year average of 77 percent but strong enough to bolster confidence.3
A Winding Road Higher
The march toward higher stock prices did not follow a straight line.
The month’s trading was choppy, with stretches that saw the resurfacing of recession fears and anxieties over future Fed rate hikes.
For instance, stocks retreated mid-month on weak retail sales and manufacturing data that raised concerns that the Fed might have gone too far in raising rates.
As the month ended, stocks wavered ahead of a busy week for earnings and the scheduled Fed meeting.
But they regained their footing on the final day of trading to close out a strong month.
Most industry sectors ended higher in January, including Communications Services (+14.77 percent), Consumer Discretionary (+15.13 percent), Energy (+2.81 percent), Financials (+6.81 percent), Industrials (+3.71 percent), Materials (+8.97 percent), Real Estate (+9.91 percent), and Technology (+9.26 percent). Three sectors posted losses: Consumer Staples (-1.09 percent), Health Care (-1.83 percent), and Utilities (-2.00 percent).4
What Investors May Be Talking About in February
|In the month ahead, investors are expected to dig into the details of the January inflation report scheduled for release on February 14.5
Investors cheered when the December update showed that inflation dropped again, confirming a six-month downtrend.
While the cost of goods has dropped over that time, the cost of services has stubbornly remained high.
In gauging how the Fed is viewing inflation progress, investors may keep an eye on the labor market, a major contributor to service costs.
The Fed has expressed that a tight labor market, with its attendant wage gains, places upward pressure on inflation.
Consequently, wage trend reports, including the monthly Employment Situation Summary and the Atlanta Fed’s monthly Wage Growth Tracker, along with the services inflation number, may become the real headlines going forward.
|The MSCI EAFE Index gained 8.05 percent, sparked by falling inflation, an improving economic outlook in Europe, and the continued reopening of China.6
European markets saw solid gains, led by Italy, which picked up 12.03 percent. France tacked on 9.40 percent, Germany rose by 8.65 percent, and the U.K. advanced by 4.29 percent.7
On the Pacific Rim, China’s Hang Seng Index rose by 11.57 percent, and Australia’s ASX 200 climbed by 6.22 percent. Closest to the U.S., Mexico’s IPC All-Share rallied 12.59 percent.8
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1. WSJ.com, January 31, 2023
2. CNBC.com, January 12, 2023
3. Insight.FactSet.com, January 27, 2023
4. SectorSPDR.com, January 31, 2023
5. BLS.gov, January 31, 2023
6. MSCI.com, January 31, 2023
7. MSCI.com, January 31, 2023
8. MSCI.com, January 31, 2023
9. CNBC.com, January 26, 2023
10. WSJ.com, January 6, 2023
11. WSJ.com, January 18, 2023
12. FederalReserve.gov, January 18, 2023
13. Reuters.com, January 19, 2023
14. WSJ.com, January 20, 2023
15. Bloomberg.com, January 26, 2023
16. WSJ.com, January 12, 2023
17. CNBC.com, January 26, 2023
18. WSJ.com, January 4, 2023
19. CNN.com, March 6, 2022