CWG Investment Committee: As January Goes So Goes the Market

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“As January goes, so goes the market” is an old adage now giving us a positive sign for 2023 versus the dreadful 2022 markets. The Nasdaq, which was -33% last year, was +10.8 % in January! The S&P 500 was +6.28% in the month vs -19% in 2022, and the AGG (Aggregate Bond market) ETF was +3 % vs -12% in 2022. 

Fed Chairman Powell indicated yesterday that a few smaller hikes may be coming this year, but markets sniffed out his rises are close to an end.

We are anticipating 2 negative GDP prints in the next 2 quarters vs. +2.9% last quarter. GDP for 2023 is likely to be less than 1%.

Earnings estimates remain in the $220 range for SPX in 2023 at this moment. At 4160 on the SPX, we derive a forward price earnings ratio of 18.9x. Should earnings decline to $200 for SPX, we get a P/E of 20.8x. This latter P/E ratio is at the high end of historic ranges. 

What does this mean for investors? We can now get a "risk free" 4.76% on 6-month T bills, 4.09% on 2-year Treasury notes, and 3.39% on a 10-year bonds.

With $220 in earnings for 2023 we derive an earnings yield of 5.28 % on stocks, making them relatively attractive to those 10-year Treasury bonds, but still not cheap.

What to do? We continue to diversify among major asset classes and remain generally conservative as the economy moves toward a likely recession.

Post midterm election years are almost all positive, as are years after a 20% loss in stocks. Rates on long Treasuries are down from 4.33% as of October 21, 2022, so markets are baking in a recession with long rates falling even as short rates rise.

How long will the Fed remain tight? How will a China reopening effect the global economy? What will Putin do in light of a long-drawn-out war? Is our U.S. debt at $31 trillion too high? GDP in 2022 was $25.5 trillion. This gap last happened after World War 2. Now we are carrying a large debt load versus our total production capacity.  Large debt slows growth, as we all know.

High rates mean entitlement and defense spending can't go up much from here. Expect to see lots of headlines about the "debt ceiling" which will be breached by August if not raised before then. A Republican Congress should hold back any big new spending programs.

The consensus view on Wall Street is that the U.S. will experience a recession this year. Many believe it is likely to be shallow. Whether we get a “hard landing" or " soft landing" is where the debate is centered.

While we maintain a conservative approach to investments, we are aware of a long market history that shows almost all years following a 20% decline are positive.

We anticipate a less rocky road going forward if current trends continue. It appears that many of the dark clouds are parting. 

If you have questions or comments, please call or email.


All the best!

Doug Coppola - Executive Director & Investment Committee Chairman
 Steve Lindgren - Chief Investment Officer & Partner
 Bob LeBeau - Research Director & Investment Committee Executive