Market focus shifts from inflation to growth

DEWITT, Mich. - Jan. 24, 2023 - PRLog -- Key takeaways

• After a positive start to the year in markets – in part driven by a better inflation narrative in the U.S. and globally – this past week investor sentiment seemed more mixed. Equity markets turned negative midweek after economic data pointed to a weaker manufacturing sector and U.S. consumer. In addition, the overhang from the ongoing U.S. debt-ceiling debate, along with mixed earnings results, weighed on markets.
• We would expect ongoing volatility as economic and earnings data bottom, but historically markets have been forward-looking and can start to recover about six months before the end of an economic downturn¹. Perhaps the silver lining for balanced investors is that bond markets have held up better, with the Bloomberg U.S. Aggregate Bond Index up about 3.3% this year and the Bloomberg U.S. Corporate Bond Index up around 4.0%¹.
• More broadly, as the economy potentially enters a downturn and the Federal Reserve pauses its interest-rate hiking campaign, we would expect bonds to continue to play more of a diversification role in portfolios.

Where did economic growth concerns stem from last week?

Markets seemed to take a notable turn lower last week after a slew of weaker-than-expected economic data. On Wednesday, U.S. retail sales data for December fell by 1.1% monthly, below the expected 0.8% decline, and at the lowest monthly reading in 2022. This softness occurred during the holiday-spending season and indicated broad-based weakness, including in big-ticket items like auto sales and furniture. This was perhaps the first signal that the U.S. consumer is starting to pull back, feeling the impact of both elevated inflation and potential economic weakness. Investors will now be watching to see if this trend continues into early 2023.

In addition to a weaker consumer, manufacturing data last week disappointed. Industrial production fell by 0.7% monthly in December, below estimates of down 0.1%, also at the lowest reading of 2022. The NY and Philadelphia Fed indexes indicated manufacturing trends contracted in January, both seeing weakness in activity and new orders. This also confirms an ongoing trend of softening demand for goods, as highlighted earlier in the month by weaker-than-expected U.S. ISM manufacturing data.

Overall, economic data has surprised to the downside recently, driving the U.S. economic surprise indexes to their lowest reading since September. While one month does not make a trend, several leading indicators are pointing in the direction of a slowdown in growth ahead. In addition, with headlines around a potential recession, layoffs and political strife, consumers may naturally be pulling back spending heading into the new year.

Source: 1. FactSet