US stocks rallied to start the year with all major indices moving higher in January. The main driver was a shift in focus from a possible recession to a possible pause or pivot in Fed policy. With approximately half of S&P companies reporting Q4 earnings, 70% of companies have reported EPS beating estimates, but many have lower forward guidance. Economic news was mixed over the month. U.S. employers added 223,000 jobs in December, slightly above the 200,000 estimate. The unemployment rate fell to 3.5% in December, matching a 50 year low. Inflation data continued to trend lower in December. The producer-price index increased by 6.2% annually in December, the lowest level since March 2021. CPI increased by 6.5% annually in December, down from 7.1% in November. Core CPI, which excludes food and energy, climbed by 5.7% annually in December below the 6% increase in November. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 5% annually in December, down from a 5.5% increase in November. US retail sales fell 1.1% in December, capping an overall weak holiday shopping season. The U.S. economy grew in the fourth quarter with GDP increasing at a 2.9% annual rate, down slightly from the 3.2% increase in the third quarter. U.S. existing-home sales declined for an 11th straight month falling 1.4% in December, hitting the slowest pace since November 2010.
Foreign stocks also rallied in January as inflation data showed signs of easing. The Eurozone headline inflation rate continued to fall in December, increasing 9.2% annually, down from 10% in November and 10.6% in October. The European Central Bank raised its benchmark interest rate by 0.50% and expect to raise it further based on their inflation outlook. The U.K.’s annual inflation rate fell to 10.5% annually in December down from 10.7% in November. The Bank of England raised it key rate by 0.50% to 3.5% in December, and signaled more tightening would be needed to rein in inflation. Inflation in Japan reached a 41 year high of 4% in December, adding to pressure on the Bank of Japan to unwind its monetary easing. China’s economy expanded 3% in 2022 down sharply from its 8.1% pace in 2021 and one of its slowest rates in decades as repeated Covid lockdowns slowed the economy. Oil prices fell in January, ending the month at $78.87, down from $80.26 per barrel in December. Emerging markets trailed developed markets In January and over the last twelve months.
Interest rates decreased in January as investors anticipate the Fed will slow the pace of rate increases. The yield on the 10-year Treasury fell in January ending at 3.53%, down from 3.83% at the end of December. Fed officials made comments, prior to their February meeting, emphasizing the need to be cautions and to err on the side of overtightening to make sure they get the disinflationary process to take hold in the economy and push inflation back to their 2% target. The Treasury Department began taking special measures to keep paying the government’s debts as the U.S. bumped up against its borrowing limit. The rate for a 30-year fixed-rate mortgage fell to 6.1% at the end of January down from 6.5% to end December. US Credit bonds were the top performer for January, while Municipal bonds were the top performer for the last 12 months. Longer-term bonds outpaced shorter-term bonds for January, while shorter-term bonds outpaced longer-term bonds for the last 12 months.
|Index Performance||January||Trailing 12 Months|
|US Stocks (Russell 3000)||6.89%||-8.24%|
|Foreign Stocks (FTSE AW ex US)||7.89%||-5.09%|
|US Bond Mkt. (BBgBarc Int. Gov/Cred)||1.87%||-5.13%|
|Municipal Bonds (BBgBarc 1-10 Yr Muni)||1.87%||-0.64%|
|Cash (ICE BofA ML 3-Mo T-Bill)||0.31%||1.78%|