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Stocks kicked off the New Year on a positive note, although news flows were relatively quiet. The major indexes all gained between 1-2%, with a majority of gains coming on Friday. Yields fell last week across the curve, as bonds rallied with the 10-year yield down 0.30%. Last week confirmed a “Santa Rally” for the seventh year in a row, with a ~0.8% gain for the S&P500 across the last five trading days of 2022 and the first two trading days of 2023. This is traditionally seen as a bullish (positive) indicator for the year ahead (although last year certainly ran counter to this trend).
Most of the week was, once again, focused on labor market-related statistics. Thursday morning, ADP released their report for December payrolls, showing that the economy had added 235,000 jobs during the month, 90,000 more than expected. This brings yet another ‘good news is really bad news,’ since the Federal Reserve has identified labor markets as a main indicator that they are waiting to decline before budging on their interest rate policy. Labor market indicators are typically seen as lagging indicators, being some of the last to react to policy changes. The news sent markets downward on fears of stronger Fed policy despite the downward turn in the housing market (another lagging indicator).
Friday’s economic reporting rescued the week, as December saw a much smaller increase in hourly earnings than expected. Consensus estimates expected an increase of 5.0% in wages compared to a year ago, though the number came in significantly smaller at 4.6%. Since the Federal Reserve has also mentioned wage growth as a major inflationary concern, the news sent stocks soaring. ISM Services PMI, an index that measures the service industry, showed an unexpected contraction in December, which boosted markets even further.
The week ahead will kick off earnings season. Banks will be in the spotlight on Friday, as JP Morgan, Bank of America, Citigroup and Wells Fargo all report. This will feed into the following week, when December Consumer Price Index numbers will give us the next update on the current course of inflation. As earnings progress, key aspects of these reports will include holiday sales, supply chain impacts, and business outlook.
In geopolitical news, the week has left significant information for the market to digest. In Brazil, the peaceful transfer of power faces disruption, with supporters of defeated presidential candidate Bolsonaro storming buildings in the capital. In the war in Ukraine, western allies committed to supply armored fighting vehicles, including M2 Bradley Fighting Vehicles, French AMX-10s, and German Marders. In the United States, the election of the Speaker of the House gridlocked congress when, for the first time in over 100 years, the first vote failed to elect Kevin McCarthy. After days of negation, the fifteenth vote saw McCarthy elected and new members sworn in.
News surrounding the economy remains mixed. No one knows when things will rebound (or how markets will respond to reports along the way), so investing with a long-term perspective is essential. As Ecclesiastes 11:6 states, “Sow your seed in the morning and do not be idle in the evening, for you do not know whether morning or evening sowing will succeed, or whether both of them alike will be good.” We remain cautiously optimistic that our consistent seeking of opportunities will provide successful yields, as spring draws closer.
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