- Some January economic data continuous to be weak and point towards a possible recession, namely: retail sales, ISM (below 50) or new home sales. Yet employment data (both unemployment and job gains – especially the recent nonfarm payroll data) or delinquencies on credit card debt remain at historical strong levels. These mixed signals make the exact timing of the recession difficult to forecast.
- At Davos global leaders concurred that a recession is likely this year (timing), including all major bank CEOs but leaders are more optimistic than before in part due to China reopening.
- We mentioned in December that markets are extremely oversold as judged by a number of technical and breadth indicators. The markets have staged a rebound and the S&P 500 is now above the 200-day moving average (3957) and the 38.2% Fibonacci retracement level between the COVID low (2237) and all time high (4796) at 3818. The longer we stay above these levels the more significant they are. But perhaps more importantly the fact that risk appetite has increased in January does not negate the bearish case.
- Emerging market stocks started 2023 with a bang. EEM is up around 12% and Hang Sang 13% just in the first month. This move is supported by two major tailwinds, namely: a peak in the dollar and China reopening. We have long been a proponent of 70/30 diversification (with a tilt towards Asia) especially now that the USA is looking at a possible rescission. It is important to stress that this type of outperformance can be persistent with Morgan Stanley saying, “the Decade of Emerging Markets has begun.”
Our Thoughts
The first month of 2023 is in the books and a strong start to the year for markets has provided a welcomed reprieve from the constant selling pressures of 2022. We are not convinced that this cheery outlook is sustainable, however. Employment has gotten off to an incredibly strong start, with nonfarm payrolls posting their strongest gains since July 2022. This will likely lead to a FED that remains hawkish with rate policy, which likely will create a negative feedback loop into markets that are expecting the FED to start easing soon. The disconnect in that “good news is bad news” likely continues to create confusion for investors. Your ability to manage behavioral impulses remains critical.