top of page
  • Writer's pictureNate Baim, MBA, CFP®

Powell's Not Done: January Recap and February Outlook


The market adage is "as January goes, so goes the year." Is it true? According to an analysis by Fidelity, January returns are positive about 75% of the time the full year turns out positive.


The recent rally was certainly a relief after last year's dismal performance. While stocks and bonds are still positively correlated, the return to solid bond performance at least means the 60/40 has a chance of righting the ship.


But the data continues to be open to interpretation. Strong economic indicators like employment, a better-than-expected earnings season, and consumer spending don't seem to match the rapid change in GDP expectations.

Let's get into the data:

12-month CPI was 6.5% in November. The Bureau of Labor Statistics reported the number was the smallest increase since October 2021.


The January non-farm payroll number was 517,000. The report from the Department of Labor was 187,000 jobs above the consensus estimate.

The unemployment number is now at 3.4%. For historical context, the last time it was it hit this level was the year of the moon landing.

Fourth quarter real GDP was 2.9%, according to the U.S. Bureau of Economic Analysis's first estimate released on January 26. The Atlanta Fed's GDPNow model estimate of 1Q GDP was 0.07% on January 27.


What Does All of That Data Add Up To?

The 25-basis point increase to the critical short-term rate marked a return to more normal Federal Reserve behavior, making minor, incremental changes to fine-tune the economy. However, Powell's comments at the press conference following the meeting could be viewed as the Federal Reserve equivalent of the groundhog seeing his shadow (which he did).

We're in for six more weeks of seasonal winter and however many months of Fed rate hike winter. The markets reacted with a wink and nod and interpreted the remarks as dovish. The received wisdom seemed that with inflation trending down, the Fed would blink and return to propping up markets when faced with slowing growth.

However, the blow-out non-farm payroll number brought a different message. The best interpretation is that the underlying strength of the economy is proving resilient as job growth continues, demand switches back to services, supply chains unkink, and inflation eases back to more normal levels.

Such robust data allows Powell to permit the rate hikes already enacted to work through the economy. Recent messaging from Fed governors indicated that the possibility of a soft landing is getting less remote.


That doesn't square with what Powell said in the press conference, in which he cited a labor market this is still out of balance and labor force participation that is unchanged from a year ago. Despite substantial evidence indicating that inflation is on a sustained downward path, Powell noted, "This is not grounds for complacency."

That may be interpreted as the Fed needs to move the terminal rate upwards from the recently projected 5.1% peak and keep it higher for longer.

Given the mismatch between Powell's language, the incoming economic data, and the continued strength of the labor markets and the consumer, volatility is likely to continue.

This all means we are likely not out of the woods yet. We're still not done with this fed funds rate cycle, and the trajectory is already the steepest since the mid-1980s.




Equity Markets in January

  • The S&P 500 was up 6.18%

  • The Dow Jones Industrial Average gained 2.83%

  • The S&P Mid-Cap 400 increased by 9.14%

  • The S&P Small-Cap 600 rose 9.40%

*Source: S&P. All performance as of January 31, 2022

January saw eight of the eleven S&P 500 sectors up and Consumer Discretionary in the lead, up 14.99%. Earnings season has so far outperformed. As of 170 issues reported, 119 (70.0%) have beaten earnings, and 107 of 169 (63.3%) exceeded expectations on sales. Q4 earnings are expected to post a 2.7% gain over Q3 2022 and be down 8.8% over Q4 2021.


Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.50%, a decrease from 3.88% in December. The 30-year U.S. Treasury ended December at 3.63%, down from 3.97% last month. The Bloomberg U.S. Aggregate Bond Index ended January with a return of 3.08%. The index continued the positive correlation trend between the equity and bond markets.


The Smart Investor

The watchword for this year is patience.


A strong January makes an excellent start to the year, but volatility is likely still on the horizon. Until the terminal rate for the Fed is clearly in view, markets will react to ongoing data.


The Fed's March meeting may provide some clarity, but Powell has been very consistent in his ongoing fear that pausing – or reducing – rates too soon could result in inflation remaining too high. A booming job market cushions the economy but makes the job of the Fed far more complex.


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

  • Diversification remains a challenge. Ensuring that your portfolio is adequately diversified by adding non-correlated assets can help smooth volatility.

  • Timing an entry or an exit is very difficult to pull off successfully. There may be some false starts before a recovery gets fully underway.

A big-picture focus can be valuable in your financial planning and investment strategy. Consider sticking to your long-term plan (so long as it still is appropriate for your goals) and avoid trying to time the markets as we get to the home stretch on this Fed rate cycle.


If you are navigating your finances and trying to understand how your finances can enable you to achieve your goals, feel free to place a complimentary 30-minute meeting on my calendar. In that meeting, we can discuss your objectives and situation.





Have something on your mind?

 

This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.


Pursuit Planning and Investments, LLC (“PPI”) is a registered investment advisor offering advisory services in the State of Oregon and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past results do not guarantee future results. Please contact us at 971-803-5948 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from PPI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.planyourpursuit.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.


This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.


Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.


The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pursuit Planning and Investments, LLC (referred to as “PPI”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.


All opinions and estimates constitute PPI’s judgement as of the date of this communication and are subject to change without notice. PPI does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall PPI be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if PPI or a PPI authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.


コメント


bottom of page