Mixed Messages

Telemus Weekly Market Review January 2nd - January 6th, 2023

Flipping into a new year didn’t alter market behavior, as a slew of news items sustained volatility and daily swings for stocks and bonds. After a very strong day on Friday, the S&P 500 concluded the week up +1.5%. Bonds outpaced stocks on the week with the common bond market benchmark, the Bloomberg U.S. Aggregate index, generating a gain of +1.9%. 

It was a week of heavy news flow with economic indicators and corporate financial updates offering a diverse array of readings. On the economic front, industrial activity for the month of December was tepid. The ISM Manufacturing index indicated that manufacturing activity is at its lowest level since May of 2020. Moreover, declines in forward looking statistics such as new orders and backlog of orders indicates that activity is unlikely to rebound in the months ahead. Alternatively, services activity was surprisingly soft, reversing after rather strong levels in November. Of note were the construction and real estate industries which stood out as experiencing softer activity. 

Collectively these two readings did not provide a reassuring picture on the economy. However, Friday’s employment report for the month of December showed the unemployment rate falling to 3.5%, with labor participation rates ticking higher. In addition, average wages increased 4.6% over the past year, which was a decrease from wage inflation of 5.1% in November. The employment data balanced out what is occurring within the ISM data, indicating that while industrial activity may be slowing, it’s not yet impacting employment. Moreover, the combined reports provided further evidence that inflation may be on the mend given the deceleration in wages and signs from the industrial sector that supply chain issues are no longer a challenge. 

What can make these economic reports more challenging to interpret are the market’s reaction. Given the hope and desire for a soft economic landing following recent Federal Reserve rate hikes, markets are at times interpreting negative economic news as a positive since it indicates the Fed may not need to be as aggressive going forward. Bond markets cheered weaker industrial data, with yields on Treasury bonds five years in maturity or longer dipping three tenths of a percent, or 0.3%, lower on the week. 

In addition to economic data, we began to get some insights out of companies on how they are holding up given a softer economy. The news was generally negative. Companies such as Walgreens Boots Alliance and Constellation Brands lowered expectations for 2023 given lower profit expectations. Costco stood out to the positive as its sales trends continued to hold up well through December. Beginning this coming Friday, we’ll begin to start seeing a more regular cadence of fourth quarter earnings reports where the attention will be focused on CEO and CFO expectations for 2023. 

All in all, while a positive start to the year for stocks and bonds is appreciated, it does seem to be fueled by speculative expectations that the Fed may indeed back off of its firm commitment to continue raising interest rates and then holding them steady throughout 2023. Our expectation is that volatility fueled by shifting expectations will likely be a continued theme throughout 2023 as the market see-saws between hawkish (tighter) and dovish (easing) outlooks for the Federal Reserve. In such an environment, regularly trimming winners and adding to laggards tends to add value. 

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.

Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.