well-th notes

By Hightower St. Louis on February 1, 2023

Weekly data-driven insights on the markets and economy

First Week of February 2023

Erring on the Side of Soften

Markets rose last week as investors seemed reasonably convinced that a soft landing — slowing growth as inflation falls, but without recession — can be achieved. U.S. stocks, as measured by the S&P 500, rose 2.5% and have risen 6.0% year-to-date. U.S. bonds were relatively flat for the week (0.1%) but have risen 2.6% year-to-date.[i]

Fuel for the Buyer

A 4.4% year-over-year rise in December of the core Personal Consumption Expenditures Price Index (the Fed’s preferred measure of inflation) was the slowest year-over-year rise since October 2021 and among data last week that supported hopes for a soft landing.[ii] Also, the University of Michigan’s Consumer Sentiment Index rose from 59.7 in December to 64.9 in January, boding well for consumer spending.[iii]

Growing Pains

GDP rose at a 2.9% annualized pace in 4Q2022. This was slightly higher than the 2.8% economists expected but not without underlying pain points.[iv] For example, while it was supported by a solid 2.1% rise in consumer spending, it was also propped up by two more volatile categories, inventories and a narrowing trade balance, which boosted GDP growth by nearly 1.5% and 0.6%, respectively. Housing market activity shaved 1.3% from GDP growth, and final sales to private domestic purchasers — a category used to measure overall demand for goods — grew at only a 0.2% annual rate.[v]

Ties That Bond

In a return to a more historically normal relationship (which has helped diversify portfolios), the correlation between Treasury bond yields and stocks leapt to 80% in the 10 trading days leading up to Friday, after being negative for most of last year. This marks a return to “good news being good news again,” whereby signs of economic growth encourage stock prices and bond yields higher. Whether this relationship can be maintained in the near term will depend largely on Fed messaging this week.[vi]

Falling Short

The blended (actual results for companies that have reported, combined with estimated results for companies that have yet to report) earnings decline for 4Q22 was -5.0% as of the end of last week. This is below the -3.9% that was expected mid-month before most companies reported,[vii] and if maintained, would mark the first year-over-year decrease in earnings since 3Q20 (-5.7%).[viii]

Arrested Development

After declining for the first time in more than a decade in 2021, employee engagement in the U.S. fell further in 2022 to 32% compared to 36% in 2020. The engagement of younger workers (those under 35) fell more than that of older workers, and the largest decline in engagement by work location (e.g., remote vs. on-site) was among those in remote-ready jobs who are currently working fully on-site. Active disengagement among this group increased seven points from 2019-2022.[ix]

All Across the Land

U.S. labor market strength has been geographically broad-based. Employment increased in 42 states year-over-year in December 2022 and was essentially unchanged in eight states and the District of Columbia. The largest percentage increases occurred in Texas (+5.0%), Florida (+4.8%) and Oregon (+4.2%). The smallest gains were in Mississippi (0%), the District of Columbia (1.3%) and Montana (1.3%).[x]

Tricks of Trade

International trade has historically enjoyed bipartisan support in the U.S., with 75% of Americans indicating in 2021 that they think it is good for the U.S. economy. At the same time, Americans also widely support industrial policies that favor domestic businesses. For example, 72% of Americans (72% of Republicans and 73% of Democrats) believe the U.S. should subsidize domestic businesses in industries that receive foreign subsidies, and 57% (73% of Republicans and 50% of Democrats) believe it should ban or limit imports from companies in industries that compete with key U.S. businesses.[xi]

Holiday Hangover

According to an annual survey conducted by Lending Tree, 35% of Americans took on holiday debt in 2022, down slightly from the prior year’s 36%. But the average amount of debt they took on was $1,549, 24% higher than last year and the highest in the survey’s eight-year history. 37% of these holiday debtors said it will take them five months or more to pay off the debt, up significantly from 28% a year ago.[xii]

Hurts Rushing

Jalen Hurt’s one rushing touchdown against the 49ers on Sunday brought him to 15 for the season, which is the most in NFL history for a quarterback in a single season. It also helped the Eagles reach 39 for the season, which is an NFL record and exceeds the prior record of 38 achieved by the Frankford Yellow Jackets in 1924.[xiii]

[i] Factset, total returns as of January 27, 2023. “U.S. bonds” as measured by the S&P U.S. Aggregate Bond Index, which seeks to measure the performance of publicly issued U.S. dollar denominated investment-grade debt.

[ii] U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCEPILFE. Accessed January 30, 2023.

[iii] University of Michigan, “Surveys of Consumers,” http://www.sca.isr.umich.edu/. Accessed January 30, 2023.

[iv] Cox, Jeff, “U.S. GDP Rose 2.9% in the Fourth Quarter, More than Expected Even as Recession Fears Loom,” CNBC, January 26, 2023, https://www.cnbc.com/2023/01/26/gdp-q4-2022-us-gdp-rose-2point9percent-in-the-fourth-quarter-more-than-expected-even-as-recession-fears-loom.html. Accessed January 30, 2023.

[v] Lahart, Justin, “Growth Was Less Than Advertised, Better Than Feared,” The Wall Street Journal, January 26, 2023. “Housing market activity” as measured by residential investment.

[vi] Mackintosh, James, “For Markets, Good News Is Good News Again,” The Wall Street Journal, January 31, 2023.

[vii] Butters, John, “Will the S&P 500 actually report a decline in earnings for Q4?” FactSet, January 13, 2023, https://insight.factset.com/will-the-sp-500-actually-report-a-decline-in-earnings-for-q4. Accessed January 17, 2023.

[viii] Butters, John, “S&P 500 Earnings Season Update: January 27, 2023,” FactSet, https://insight.factset.com/sp-500-earnings-season-update-january-27-2023. Accessed January 30, 2023.

[ix] Harter, Jim, “U.S. Employee Engagement Needs a Rebound in 2023,” Gallup, January 25, 2023, https://www.gallup.com/workplace/468233/employee-engagement-needs-rebound-2023.aspx. Accessed January 30, 2023.

[x] Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Employment up in 42 states over the year ending December 2022 at https://www.bls.gov/opub/ted/2023/employment-up-in-42-states-over-the-year-ending-december-2022.htm. Accessed January 30, 2023.

[xi] Meng, Phillip, “Free Trade with Exceptions: Public Opinion and Industrial Policy,” The Chicago Council on Global Affairs, January 25, 2023, https://globalaffairs.org/commentary-and-analysis/blogs/free-trade-exceptions-public-opinion-and-industrial-policy. Accessed January 30, 2023.

[xii] Schulz, Matt, “Average Holiday Debt Nears $1,550, Highest in LendingTree Survey’s 8-Year History,” LendingTree, December 27, 2022, https://www.lendingtree.com/credit-cards/study/holiday-debt/. Accessed January 31, 2023.

[xiii] Breech, John, “Winners and losers from AFC and NFC championships, plus early Super Bowl LVII odds for Chiefs-Eagles,” CBS, January 30, 2023, https://www.cbssports.com/nfl/news/winners-and-losers-from-afc-and-nfc-championships-plus-early-super-bowl-lvii-odds-for-chiefs-eagles/ Accessed January 31, 2023.

Disclosures:

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