.jpeg)
Hello from rainy San Francisco, home of the 2023 NFC Champion 49ers (yes, I know they play in Santa Clara please don't remind me) where I eagerly (nervously) await next Sunday's Super Bowl!
I wrote about my hopes for an elusive 6th Super Bowl for my favorite football team back in September 2023 (that was my Bonds...no not James Bond post.) In that edition, I wrote about the possibility (threat) of interest rates being higher for longer (i.e. no Fed intervention to lower rates) if inflation persisted.
As it turned out, inflation data has been positive and the Fed may lower rates after all. Great news, right?
Well, January markets were a bit mixed with large U.S. stocks continuing their dominance with the S&P 500 +1.59% and the Nasdaq +1.02%. Short-term bonds were positive as well at +0.30%.
Both the broad-based bond index and developed international stocks were slightly negative for the month, returning -0.15% and -0.45% respectively.
The news wasn't as good for emerging markets (-3.55%) and small U.S. stocks (-3.93%) which were solidly in negative territory for the month.
So what gives? To keep with the football theme this month, I'll give you my 3 keys to victory for the markets:
Inflation & Interest rates: Yes, these are technically two separate things but they are so closely related that I'm including them here as a duo.
As mentioned above, the Fed has suggested they will lower interest rates this year, perhaps as early as May. Typically, lower rates are a boost to the stock market as risk assets (stocks) are seen as offering better return than less-risky assets (bonds & cash.)
Employment: One of the big questions of 2023 was, could we get inflation under control without massive unemployment? Thus far the answer is yes! The January jobs report was excellent, with unemployment holding at a solid 3.7%, 353K jobs were added in the month and personal earnings were +4.5% over the previous 12 months.
Earnings: Regular readers of this newsletter know I mention earnings often, as they are the lifeblood of the stock market. Earnings have been resilient over the past several years despite Covid, inflation, etc. Thus far, Q4 2023 results have been a bit lackluster. Is this cause for concern?
Maybe, but also maybe not. Much of January's posted results came from the Financials sector, which were fairly weak. Despite the disappointing data, there seems to be a line of demarcation between the haves and have nots, with companies posting results after January 19th are reporting earnings surprises at a 75% clip to end the month! This late rush of strong earnings results has even pushed year over year earnings into positive territory!
If interest rates remain stable or go lower, employment data remains strong and Q4 earnings continue this late January trajectory our economy can continue accelerating like Christian McCaffrey on a long touchdown run!
I'll be curious to see what the inflation, employment and earnings data are in February. Oh, and will the 49ers hoist the Lombardi Trophy once again?
As always, stay tuned and until then go 49ers!
Steve