Despite long-term volatility, the markets demonstrated their resilience in January, bouncing back from losses in December and marking gains in three of the last four months. All major indices showed improvement, with the NASDAQ Composite Index (COMP) leading the way. Economic growth also showed signs of life, with fourth quarter GDP increasing at a 2.9% annual rate. Inflation also moderated, prompting the Federal Reserve (Fed) to raise rates at its slowest pace since March 2022. Source: Bureau of Economic Analysis Stocks Bounce Back In January, the markets bounced back after taking a step back in December. The NASDAQ Composite Index led the upswing, gaining 10.7% over the month and marking a sharp reversal from the 8.7% decline in December. Not to be outdone, the S&P 500® (SPX) was also up 6.2% in January after posting a 5.9% decline in December. The Dow Jones Industrial Average® (DJIA) eked out a positive number in January as well, up 2.8% for the month, a welcome change from the popular index's 4.2% loss in December. All told, the three major indices delivered positive gains in three of the last four months.
Economic Growth Up Investors and traders alike may have been pleasantly surprised by the positive economic growth numbers released for the fourth quarter of 2022 by the U.S. Department of Commerce. Real gross domestic product (GDP) increased at an annual rate of 2.9%. Almost every major economic sector contributed to positive results, including increases in consumer spending, inventory, business investment, imports, and government spending. While the growth rate is below the 3.2% annual rate the economy booked during the third quarter, the 2.9% was better than the 2.8% that economists surveyed by Dow Jones expected.
Inflation Continues to Slow The markets likely felt a collective sigh of relief after the latest inflation numbers hit the Street. The Consumer Price Index (CPI) declined 0.1% during December. That reverses the monthly increases of 0.1% in November and 0.4% in October. On an annual basis, prices increased by 6.5% in December. While that's still elevated, the increase marked the lowest annual increase since the 6.2% annual rate in October 2021. But the inflation fight appears far from over. While prices are moderating, consumers aren't yet jumping for joy. What people spend on groceries – so-called "food at home" – was up a staggering 11.8% annual rate in December. That's on top of the 12% annual rate in November and the 12.4% annual rate in October. In addition, prices continue to rise across the board for other necessities, including energy, electricity, natural gas, and shelter. Sources: U.S. Bureau of Labor Statistics; CNBC
Interest Rates Up Again but Pace Slowing With inflation still rising, it's no surprise that the Fed decided to raise interest rates again. But this time, the increase was just 0.25%, the lowest since March and half of December's 0.5% hike. This latest move by the Fed caps a series of increases that have totaled 4.75% in less than a year. While inflation remains significantly above the Fed's benchmark long-term rate of just 2%, its rate of increase is moderating. That has given the central bank more breathing room than it enjoyed over the past year. Although the Fed indicated that future rate increases were definitely on the table, the trajectory of rate increases suggests that investors and consumers alike will see a more nuanced interest rate policy from the Fed during 2023. That could mean the historical pace of increases that marked the Fed's policy during 2022 is likely coming to an end. Sources: Federal Reserve; CNBC
Action Steps Taken You probably noticed more transactions this past month than in the previous months. I am starting to feel more comfortable putting cash to work in both stocks and bonds. I still think there is short-term volatility ahead, but I feel much better today about the market's long-term prospects. Bought AXSIX: Bond fund with an excellent track record currently paying a 4.83% yield.
Bought VCIT: Bond ETF made up of intermediate corporate loans. This ETF is paying 4.91%.
Bought ULTA: one of the current market leaders for stocks.
Swapped out S&P 500 ETF for an equal-weighted S&P 500 ETF, so you aren't as exposed to only the largest names in the market.
Best Regards, Arthur Strauss, CFP® President & CEO www.straussfinancial.com