Equities Fall Amid Mixed Economic Data

Equities Fall Amid Mixed Economic Data

Equity markets fell slightly last week for the first negative week of 2023. Global equities (represented by the MSCI All Country World Index) were down -0.25%, and domestic stocks (represented by the S&P 500 Index) were down -0.65%.

Retail Sales

US retail sales continued to fall in December posting the lowest monthly reading for 2022 with a 1.1% drop which was worse than the expected 0.8% decline. This decline was highlighted by a pull back on discretionary and big-ticket item spending such as electronics, furniture, and automobiles.

Manufacturing Data

Manufacturing data released last week also fell below consensus estimates as industrial production declined 0.7% for December with activity and new orders contracting.

Inflation Pressures

However, inflation pressures continued to ease as the US Producer Price Index declined by 0.5% in December, the largest drop since 2020, with food and energy prices being the big decliners. The labor market remained tight with weekly jobless claims falling to 190,000 last week with this number being 241,000 in November and 261,000 in July.

Economic Data

Markets continue to digest economic data to predict the next action by the Fed. Currently based on Fed Funds futures, markets are expecting a smaller 0.25% rate hike for the Fed’s February policy meeting. Just one month ago, the probability for a 0.25% increase for February was just 65.9% while the current probability is over 99% as investors processed more downside economic data surprises and easing inflationary pressures.

Earnings Season

With earnings season picking up with more companies slated to report results, the S&P 500 companies’ blended earnings for Q4 of 2022 is currently expected to be around a 4.6% year-over-year decline. Companies are also facing continued declines to net profit margins with higher input costs being a factor. Current blended net profit margin for S&P 500 companies is 11.4% for Q4 which is down from a year prior of 12.4%. However, 2021 profit margins were historically high and the current reading is in line with the 5-year historical average of 11.4%.

Q4 GDP

The initial estimate of Q4 GDP is set to be released Thursday which is expected to show a consecutive quarter of growth in the economy following the 3.2% annual growth in Q3. The Personal Consumption Expenditures price index is also scheduled for this week as investors hope for another moderating inflation reading, and the University of Michigan will release their Index of Consumer Sentiment to gauge consumer confidence.

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.