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January 2023 Market Commentary: Can the Economy Stick the Landing?

December Recap and January Outlook

Equity Markets in December

  • The S&P 500 was down 5.90% and finished the year at -19.44%

  • The Dow Jones Industrial Average lost 4.17% and had a year end result of -8.78%

  • The S&P Mid-Cap 400 returned -5.72% and full-year performance was -14.48%

  • The S&P Small-Cap 600 decreased 6.89% and was down 17.42% for the full year

Source: S&P. All performance as of December 30, 2022

While the equity markets, as measured by the S&P 500 index, was up in the third quarter, December was a disappointment from the gains seen in October and November. There’s no understating the volatility seen in the market this year. For context, Dow Jones Market Data indicates that the S&P saw more market moves of 2% (both up and down) in 2022 than in 2020. The 46 moves over the 2% threshold are approximately four times the 10-year average of 11.3.

Inflation is dropping, if slowly. Employment is lower, but strong, which is supportive of the economy, and GDP returned to positive. What’s causing the volatility? Many factors are in play, but arguably the largest is the Federal Reserve’s moves on interest rates, and the messaging from Chairman Powell and the Fed Governors.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.88%, an increase from 3.61% in November. For comparison, the 10-year yield was 1.51% at year-end 2021. The 30-year U.S. Treasury ended December at 3.97%, up from 3.75% last month. The Bloomberg U.S. Aggregate Bond Index ended December with a return of -0.45%. The year-to-date return at month end was -13.01%, continuing the trend of positive correlation between the equity and bond markets.

What Does All of That Data Add Up To?

While an overstatement, it does seem at times that the only data the market is interested in are the number of hundredths of a percentage point of that make up the increase in the Fed Funds rate – and when that will go to zero or turn into a decrease. No one seems more aware of this than the Fed. Back in the day, before 2008, pronouncements from the Federal Reserve were crafted to be obscure so as to avoid moving markets. This changed over time and with successive Fed Chairmen to a more direct approach. The current Chairman, Jerome Powell, has evolved still further. First, we had the “Fed ratchet” of earlier this year, in which Powell telegraphed moves that the market could adjust to gradually. This may have worked too well. While asset values have declined, the market remains poised to bounce up at every hint that the Fed may slow or stop rate increases. This may be masking or even delaying the impact of rate increases in slowing the economy and bringing inflation down. With the economy seeing a lagging impact from rate increases already enacted, this is complicating the Fed’s ability to accurately read the economic tea leaves and know when to stop in order to avoid a recession. Powell has resorted to using the Fed’s pronouncements to continue to assert that bringing down inflation is the highest priority and that any thought that the Fed will ease off before the job is done is a “misperception.” This could be read as an attempt to influence the market and keep asset values lower.

Whether the resolve is solid remains to be seen. While Powell is clear on getting inflation down, the Fed is still positioning a “soft landing” in which the economy avoids recession as a possibility. That would require some easing of rates.

The Smart Investor

The ongoing strength of the labor market is providing some hope that if 2023 does see a recession, it will be mild. However, predictions are that growth will slow from its already low levels. The path of the markets is likely to be as choppy as 2022, with observers and investors still playing “watch the Fed” and the Fed attempting to fight inflation while managing expectations in a way that will be helpful to Fed policy and not fight it.

What should investors focus on? The same thing as every year: your own goals. There’s no substitute for having a plan, no matter what stage you are in. The SECURE 2.0 act has made meaningful improvements to the ability of just about everyone to save for retirement, or conserve retirement savings. Updating your plan to take advantage of the new opportunities makes sense.

There are some tactical things you may want to think about:

  • 401(k) limits increased. Think through when you’ll contribute. If you normally use a bonus for this, you may want to consider a different approach

  • The age for required mandatory distributions increased – consider taking advantage of the additional year to lower account values through a Roth conversion

  • Don’t forget your RMD, or complete a qualified charitable distribution to offset it

  • Ongoing volatility means diversification is even more important

The start of the year is all about resolutions. But there’s a reason that the second Friday of January is known as “Quitter’s Day.” When it comes to your financial plan, having resources build and monitor an ongoing structure that runs in the background and help you achieve your goals.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA


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