The new year is off to a flying start. We are already into the second month of the year and the stock market has jumped hot out of the gate. The S&P 500 has year-to-date returns of 7.45%. The Dow is up approximately 2.31% YTD and the NASDAQ has the most impressive returns of the new season coming in at 14.36% YTD1. These returns are a very welcome sign after the tumultuous year we had in 2022 and stretching back into the 4th quarter of 2021. The question then is, what is contributing to the positive returns this year and what factors will dictate their continuance?
There are a couple main factors to weigh when we talk about the stock market and its influences. The markets are moved by social and political factors. Political upheaval and political peace can result varying returns in the markets. Socially, current events can change investor sentiments towards certain companies and the health of the economy at large. Fluctuating interest rates can be a very important factor that determines market direction. The fear of increasing rates and thus decreased economic activity often results in market losses. The hope and fruition of decreasing rates and thus increased economic activity often cause stock prices to rise. Outside of interest rates, the releasing of economic data and company earning’s reports can often cause short-term movements in not only singular company stocks, but the market at large. Interest rate changes and the releasing of positive economic data have been two very big drivers in the rally to start this year.
Like we talked about a few months ago in a blog titled The Power of Powell, Federal Reserve Chairman Jerome Powell holds a lot of power over the markets 2. Not only is he the chairman of the body that governs the changing of interest rates in this country, he is also the main spokesperson for that body. Other members of the board are allowed to speak publicly, but his words and actions carry the most weight. So, what has he said and done so far this year? Last week the Fed chose to once again raise interest rates by 0.25%. This was generally expected by most, but it was a welcome sign for those who feared that the hike would be higher. The Fed continues to raise rates because it is their primary tool to fight inflation. Higher interest rates means that it is less enticing to borrow money. Less borrowing means that there are fewer dollars being injected into the economy and thus fewer dollars to spend. Prices then begin to decrease back to a point where demand is located. Why is this decision by the Feds a welcome sign for investors? It was not so much the decision to raise rates that encouraged investors. Rather, Jerome Powell’s remarks following the decision helped bolster investors’ hopes.
Following the Fed’s meeting Jerome Powell stated that, “Inflation data received over the past three months show a welcome reduction in the monthly pace of increases..” 3. This means that the measures they have committed to taking are starting to show that they work. Despite the fact Powell reiterated that we are far from the end of this inflationary fight, investors are beginning to see a light at the end of the tunnel. The aforementioned inflation data is moving in a positive direction. Year over Year inflation is down to 6.45% as of the end of December 2022 4. While this is still much higher than we are aiming for, Mr. Powell is correct in stating that we are starting to see a downward trend in prices. If this is the case, that means we should likely see decreasing economic output. The downside of conquering inflation is that the raising interest rates usually lead to economic contraction and recession. What are the leading economic indicators saying about the health of our economy?
After starting the year with two quarters negative GDP growth, some say this qualified as recession territory, GDP grew in the third and fourth quarter of 2022 5. The fourth quarter data released in the beginning of this year has resulted in a positive outlook from investors. Despite the Fed’s fight with inflation the economy continues to churn along. Investor’s have reacted very positively to the economy continuing to defy recessionary fears. GDP is not the only example of this. Last week the Bureau of Labor Statistics also reported that the country added 517,000 jobs to the economy while unemployment lowered slightly to 3.4%. Those numbers are not indicative of an economy that is currently in a recession. So, what does this all mean for the outlook the rest of the year?
While no man or financial firm can predict the future, continued positive economic movement can be a good sign that the stock market will have a better year than last year. If inflation is brought to a reasonable level and the economy continues to grow despite this, it would be hard to see investors not react positively to our nation’s economic future. To add to this, having a year of geopolitical peace rather than unrest wouldn’t hurt the cause either. The future remains to be seen, but it is for certain that investors are currently enjoying the returns the markets have yielded thus far this year.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries