US Economy Continues to Defy Expectations with Impressive 2023 Start

Monthly Client Letter
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
Worker in a machine shop

Photo Credit: Maxime Agnelli, Unsplash

Monthly Market Summary

  • The S&P 500 Index returned -2.5% in February, giving back a portion of its January gains and underperforming the Russell 2000 Index’s -1.7% return. Cyclical sectors marginally outperformed in February, with Technology, Industrials, and Consumer Discretionary as the top three performing sectors.

  • Corporate investment grade bonds produced a -4.2% total return, trailing corporate high-yield bonds’ -1.9% total return. The negative bond returns occurred as Treasury yields increased following robust January economic data.

  • International stocks underperformed for the first time since October as the U.S. dollar strengthened. The MSCI EAFE Index of developed market stocks returned -3.1%, outperforming the MSCI Emerging Market Index’s -7.6% return.

Data Indicates the U.S. Economy is Off to a Strong Start in 2023

Based on January economic data and fourth-quarter data revisions, the U.S. economy is in a stronger position than economists forecast. Job growth was robust in January as U.S. employers added 517,000 jobs, well above the average of 291,000 jobs added each month in the fourth quarter. Consumer spending exceeded expectations in January, with retail sales rising 3% month-over-month after two consecutive monthly declines to the end of 2022. Using industrial production as a measure, manufacturing output stayed the same in January after falling in the last two months of 2022. Investors will want more proof of the economy's recent strength in the coming months, but it seems less likely that a recession will start in the first quarter of 2023.

On a related note, January’s data could strengthen the Federal Reserve’s case to maintain a tighter policy stance for longer. There are two potential investment implications. First, the Federal Reserve may keep interest rates higher for longer, meaning higher interest income for savers. Second, a more extended period of restrictive monetary policy could have a more significant adverse impact on the economy and result in slower economic growth in the coming quarters and years. Despite market expectations for the central bank to stop raising interest rates in the first half of 2023, the Federal Reserve remains a key driver in financial markets.

An Update on Fourth Quarter 2022 Earnings Season

Source: MarketDesk Research

As of February 27th, 94% of S&P 500 companies had reported fourth-quarter earnings. Blended earnings growth, which combines actual results for companies that have reported and estimated results for companies that have yet to report, is -4.9% vs. Q4 2021. If the decline holds, it will mark the S&P 500’s first year-over-year earnings decrease since Q3 2020. Quarterly earnings growth is negative, but the results are not viewed as disastrous. However, the data indicates earnings momentum may be fading in the face of persistent macro headwinds, including the Federal Reserve’s aggressive 2022 interest rate increases and rising input costs.

Our Insights

Featured
Election Driven Rally Pushes US Equities Higher
Election Driven Rally Pushes US Equities Higher

Stocks traded higher this week, with most of the gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end.

Treasury Yields Rise Following the Fed’s September Rate Cut
Treasury Yields Rise Following the Fed’s September Rate Cut

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome.

The Next Two Weeks are Filled With Market-Moving Events
The Next Two Weeks are Filled With Market-Moving Events

This week, stocks traded lower after several weeks of consistent gains. The S&P 500 dropped -0.5%, underperforming the Nasdaq 100's +0.3% gain but outperforming the Russell 2000's -2.8% return. The Magnificent 7 rose over +2%, making Growth the only factor to trade higher. The next two weeks are filled with market-moving events, and once they pass, stocks could rally into year-end.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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