Market Update from PIA | February 2023

Investor Risk Appetite Turned Positive in the New Year

Investors in U.S. equities decided to shake it off and found a way to move on from the bleak financial market environment experienced in calendar year 2022, making shares of downtrodden stocks nearly as desirable as tickets for the latest Taylor Swift tour.  A number of large cap U.S. stocks experienced a technical trading halt at the open of a single trading session in late January, although that was the result of a manual blunder creating systematic pricing errors and was much shorter-lived than the Ticketmaster meltdown “Swifties” were forced to endure after demand overwhelmed the online ticketing site late last year.  The coincidences of the situations are striking, both with major financial ramifications and public mea culpa statements made by senior management of the New York Stock Exchange (NYSE) and Ticketmaster. 

The Securities and Exchange Commission, Justice Department and U.S. Senate were quick to respond with investigations and hearings into the matters.  System integrity, bots and algorithms will continue to be a challenge to ensuring fair trade practices for both industries.  Fortunately, no trades of Plimoth Investment Advisors were impacted by the January 24th NYSE systems glitch.  There were, however, at least a few staff-related teens and preteens caught up in the disappointment associated with the online concert ticket presale turmoil within our broader BayCoast organization.

 

In This Update:    Investment Spotlight    |   Stock Market Review   |   Economic Review Chart of the Month   |   Closing Statements

 
INVESTMENT SPOTLIGHT

High Tech Recovery Met Low Tech Espionage

Companies that suffered significant declines in calendar year 2022 (particularly technology-related) were big advancers in January, while some of the strongest areas from last year were the weakest in the new year. A cooler inflationary environment (with food and energy costs moderating) and smaller-sized moves in interest rates were likely contributors to the sentiment shift.

Markets were also strong outside of the U.S., particularly in China (up 12% for the month) where economic reopening was a positive catalyst.  A weakening of the previously high-flying U.S. dollar was an added benefit to the region.  The rapid turnaround in market strength in the second largest economy in the world flies in the face of the discovery of a low tech, low flying (60,000 feet, not all that much higher than commercial aircraft flights) surveillance balloon over the United States, confirmed to have come from China. 

MARKET INDEX RETURNS

JANUARY 2023

YTD 2023

S&P 500 Index

6.3%

6.3%

Russell 2000 Index

9.7%

9.7%

MSCI EAFE Index

8.1%

8.1%

Barclays US Agg. Bond Index

3.1%

3.1%

FTSE 3 Mo. T-Bill Index

0.4%

0.4%

Swiftie: noun (slang) a super fan of American singer-songwriter, pop star, Taylor Swift  

Surveillance balloons were used well before satellites existed as a means of gathering intelligence from the air. Their use reportedly dates back to the 1700s during the French Revolution and were utilized by the Union and Confederate armies during the U.S. Civil War.    

 
STOCK MARKET REVIEW & OUTLOOK

Risk-on Flags Were Flown Around the World to Kick Off a New Trading Year

The S&P 500 came out of the gates like a rodeo bull in the new year, posting a greater than 6% return. Renewed interest in technology stocks boosted the battered NASDAQ Composite by a whopping 11%. This was the strongest January return for the index since 2001. Higher growth segments of the market such as Communication Services, Consumer Discretionary and Information Technology were key drivers of the rally. Travel-related and auto stocks were particularly strong. The most defensive sectors of the S&P 500 (Utilities, Healthcare and Consumer Staples) were all negative for the month. The data points included below point to particularly strong “risk-on” sentiment thus far in 2023. Small cap, international and emerging markets stocks, typically viewed as higher risk, all outperformed during the first trading month of the year.

Having already taken away the punch bowl, music and decorations, the Federal Reserve’s latest interest rate hike in January did not weigh on the market’s celebration. The Federal Open Market Committee raised the Fed Funds Rate for an eighth time in the current tightening cycle by (a smaller than previous) 0.25% to a target rate of 4.50-4.75%. The bellwether 10-Year U.S. Treasury yield ended the month at 3.51%, 37 basis points lower than where it started. A hike in short-term rates in the final week of the month expanded the gap between 2-Year and 10-Year yields, further inverting the yield curve and cooling economic conditions.

S&P 500 SECTOR RETURNS

JANUARY 2023

YTD 2023

Communication Services

14.5%

14.5%

Consumer Discretionary

15.0%

15.0%

Consumer Staples

-0.9%

-0.9%

Energy

2.8%

2.8%

Financials

6.9%

6.9%

Healthcare

-1.9%

-1.9%

Industrials

3.7%

3.7%

Information Technology

9.3%

9.3%

Materials

9.0%

9.0%

Utilities

-2.0%

-2.0%

 
ECONOMIC REVIEW & OUTLOOK

U.S. Economic Growth Was Positive, While Not Particularly Exuberant

The first estimate of Q4, 2022 Gross Domestic Product (GDP) year-over-year growth was 2.9%, modestly lower than 3.2% in the third quarter, but ahead of economists’ expectations. Consumer spending was less robust than the typical holiday shopping season, but a slow pace of growth is certainly preferable to economic contraction as was experienced in the first two quarters of 2022. A look through to the constituents of growth show that the positive results were driven primarily by a rebuilding of inventories that had contracted meaningfully in the previous two quarters. Residential investment continued to be a headwind as was the case throughout 2022.

 
CHART OF THE MONTH

S&P 500 Annual Returns and Intra-year Declines

Fourth Quarter U.S. Gross Domestic Product Chart

Source: Bureau of Economic Analysis and FHN Financial

As described in the Economic Review above, Q4 GDP was positive, but driven by a rebound in inventory levels, rather than more permanent components relating to actual consumption.  Inventory rebuilds led to nearly half of the positive growth shown in the period.

 
CLOSING STATEMENT

Looking Ahead

As the prevailing winds of tight monetary policy start to lose some of their hold on financial markets and the skies over the U.S. are foreign spy balloon free at the time of this writing (as far as we know), positive investor sentiment is a prevailing force. One would expect that with a waning focus on macro-economic overhangs, investors will be paying closer attention to corporate earnings, which have begun to slow. With lower earnings guidance, an increase in valuations has come from price-to-earnings (P/E) multiple expansion. Stated more simply, optimistic investors simply appear willing to pay more for a dollar of expected company earnings.

A number of large companies, particularly within the technology sector, that bolstered their employee ranks during the pandemic, have announced sizable layoffs. These actions are occurring while the key measure of unemployment in the U.S. (U3) dropped to a 53 year low of 3.4% in the latest payrolls report. Investors appear to be rewarding this type of corporate belt tightening, followed by similar headcount reduction plans being announced by other companies with weaker than anticipated forward revenue and earnings guidance. Perhaps a continued shift in this workforce dynamic will lead to an absorption of some of the 11 million open positions reported in the latest JOLTS (Job Openings and Labor Turnover Survey) report. These are just some of the factors our team will be focused on in the coming months.

Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or if we can assist you in any other way.

 

Meet The Plimoth Investment Advisors Executive Leadership Team

Steven A. Russo, CFA

President & Chief Executive Officer
508‑591‑6202
srusso@pliadv.com

Louis E. Sousa, CFA

Senior Vice President & Chief Investment Officer
508‑675‑4313
lsousa@pliadv.com

Edward J. Misiolek

Senior Vice President & Operations Officer
508‑675‑4316
emisiolek@pliadv.com

Teresa A. Prue, CFP®

Senior Vice President & Head of Fiduciary Services and Administration
508‑591‑6221
tprue@pliadv.com

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