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2020 Financial Markets Update

Week in Review: January 6, 2023

January 9, 2023

Recap & Commentary

Markets began the year on a positive note, with the S&P 500 snapping four consecutive weekly losses while enjoying its best week since late November. December’s employment report and a decline in interest rates — the 10-Year Treasury yield fell 0.16% during the week — fueled the gains. Commodities were the notable laggard, dragged down by an 8.1% decline in oil prices. News from several weeks ago that China was scrapping its zero-COVID policies initially spurred optimism that the abandonment of draconian lockdowns would benefit both the country’s domestic economy, as well as the broader global economy. That optimism has ebbed of late as new COVID-19 cases surge, hampering the country’s return to “normal” and with it, demand for commodities.

Friday’s employment report showed that employers continue to hire workers at a healthy pace despite growing concerns of a looming recession. Business data showed that the economy added 223K jobs in December, while the government’s household survey data, which is used to calculate the unemployment rate, showed that 717K individuals found work. The combination of strong hiring, more people looking for work, a small reduction in job openings, and slower wage growth, was well received by the markets in that it balanced concerns about economic growth against those of additional Federal Reserve rate hikes.

The release of the Fed’s December Federal Open Market Committee (FOMC) meeting minutes shed little new light on the Fed’s plans for monetary policy in 2023. The minutes did note, however, that “most participants emphasized the need to retain flexibility and optionality” with respect to policy. Depending on one’s inflation outlook for 2023, flexibility could be viewed either positively or negatively.

Economic Commentary

Nonfarm payrolls increased by 223K in December, bringing total job gains for 2022 to 4.5M. Despite the Fed aggressively raising interest rates over the course of 2022, labor markets remained strong, fostering hope than any economic downturn in 2023 might prove to be relatively modest. Unemployment in December fell 0.2% to 3.5%, matching the lowest rate since 1969. The labor force participation rate in December ticked up 0.1% to 62.3% but remains below its prepandemic level of 63.4%. Headline employment gains have slowed of late, but hiring remains robust despite the Fed’s efforts to dampen employment. Average hourly wage growth slowed from 4.8% in November to 4.6% in December, helping alleviate inflationary concerns.

Manufacturing and Service Sector activity, as measured by industry group ISM, both contracted in December. Manufacturing activity contracted for a second consecutive month, falling to its lowest level since 2016, excluding pandemic disruptions. Services activity contracted for the first time since May 2020. Both sectors saw new orders contract. From an inflationary standpoint, services prices slowed to their lowest level since January 2021, though on an absolute basis continued to expand at a relatively fast pace. Manufacturing prices contracted further, falling to their lowest nonpandemic level since 2016.

Of Note

Among many measures, the recently enacted Secure Act 2.0, which made major changes to retirement savings plan, allows up to $35K of unused 529 college savings funds to be converted to a Roth IRA.

S&P 5001.5%
Small Caps1.8%
Intl. Developed2.7%
Intl. Emerging3.4%
U.S. Bond Market2.0%
10-Year Treas. Yield3.72%
U.S. Dollar0.4%
WTI Oil ($/bl)$74
Gold ($/oz)$1,871

The Week Ahead

  • Consumer Inflation (CPI)
  • Consumer Sentiment
  • Consumer Credit
  • Weekly Jobless Claims

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