Equities Rise as Central Banks Hike Rates Again

Equities Rise as Central Banks Hike Rates Again

Equity market strength continued last week amid central bank rate decisions and economic data releases. Global equities (represented by the MSCI All Country World Index) were up 0.98%, and domestic stocks (represented by the S&P 500 Index) were up 1.64%.

The Federal Fund Rate

The US Federal Reserve lifted their federal funds rate by 0.25% last week to a range of 4.50-4.75%. This rate hike continued the downshift in pace by the Fed as the last increase was 0.50% and the four prior were 0.75%. Investors were encouraged by the slowdown and Fed Chair Jerome Powell’s comments as he acknowledged signs of easing inflation, however, still in an early stage of the disinflationary process. The European Central Bank and the Bank of England also raised their key interest rates last week but at a 0.50% pace.

The Labor Market

The US Labor Market continued to show strength as 517,000 nonfarm payrolls were added to the economy in January, nearly triple Econoday’s consensus estimate of 185,000. The unemployment rate fell to 3.4% from 3.5% in December, the lowest rate since 1969. However, wage growth slowed to 4.4% on a year-over-year basis.

Manufacturing

The Institute for Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) released for January showed a continued decline and contractionary environment for the manufacturing sector. The index has fallen for 5 straight months. However, the US ISM services PMI surprisingly jumped in January, moving the services sector into expansion territory. The ISM survey has been known as a strong coincident indicator, bottoming at a similar time as the S&P 500 during recessionary periods.

Nasdaq Composite Index

The tech-heavy Nasdaq Composite index has outpaced the S&P 500 to start 2023 following an abysmal 2022 for technology and higher growth equities. The Nasdaq Composite total return index is up 13.69% year-to-date while the S&P 500 is up 7.15%. Facebook parent, Meta Platforms, helped propel the Nasdaq last week after the stock jumped 23% Thursday following the release of their Q4 earnings and positive revenue surprise. However, only 70% of S&P 500 companies have reported a positive earnings surprise for Q4, falling short of the 5-year average of 77%. Names like Apple and Amazon have also provided revised forward outlooks.

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.