Market Update: January 27, 2023

Welcome to the Weekly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth, and here’s what happened in the market this week.

 

We’ve had a nice little rally this week driven in part by cyclical and technology stocks. In fact, it looks like we may have finally broken through that year long downward trend with the latest action these last couple of days. This is a good technical sign for the S&P if these levels hold.

In the news this week, the US economy grew by 2.9% annualized for the fourth quarter of 2022. Google prepares to do battle in the courtroom over potential anti-trust violations. And the labor market continues to remain very resilient in light of a slow down in the economy.

With the stock market breaking through the downward trend, the debate rages on in the investor world. Is the economy still heading for a recession? Or did the Fed make all the right decisions and we’re now heading for a “soft landing?”

So let’s dive in. In support of a soft landing, investors are now preferring the higher risk higher reward prospect of consumer discretionary stocks relative to staples. Since the revenue sources for staples are relatively stable regardless of what’s going on in the economy, these stocks tend to be hiding places for capital when the economy turns sour. Currently, investors are taking a bit more risk with discretionary stocks implying that the bottom might be in. Likewise, semiconductor stocks have been selling off throughout this bear market. These technology stocks are also high risk, high reward but tend to be the primary indicator of the health of the 21st century economy. Because these stocks are now participating in the rally, it can be inferred that the forward looking economy could look a lot better than the current one.

Finally, high yield bonds are often a great indicator of the health of corporations. As the spread on these bonds spike, like in 2020, that often implies that defaults on these high risk bonds are imminent and the economy is in rough shape. Over the last several months, the spread on these bonds have been falling implying the risk of default and economic shock is low.

However, there are a ton of reasons to be cautious. First, the 10 year minus 3 month treasury spread is still inverted. In fact, it’s the most inverted it’s been since the 1970’s. Inversion of this spread has been a reliable indicator of the last 4 recessions.

Likewise, the leading economic indicator index has accurately predicted 2 of the last 3 recessions when the index growth drops below 5%. This index of 10 different leading indicators is a great barometer of the health of the economy. Currently, the index is flashing a recession signal.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved January 26, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). Equal weight discretionary vs equal weigh staples (Interactive Charts). Retrieved January 26, 2023, from FactSet Database.

3.FactSet Research Systems. (n.d.). SOXX relative to SPY(Interactive Charts). Retrieved January 26, 2023, from FactSet Database

4.Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, January 26, 2023.

5.Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity [T10Y3M], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y3M, January 25, 2023.

6.The Conference Board. US Leading Indicators. “The trajectory of the US LEI continues to signal a recession.” Updated January 23, 2023. Retrieved from https://www.conference-board.org/topics/us-leading-indicators

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