A Green January

2023 started off strong with all US stock indexes finishing the month in the green, a welcomed sight for investors. The S&P 500 added 6.2% in January, while the Nasdaq Composite finished the month gaining 11% – marking its best start to the year since 2001.

Optimism stems from a combination of cooling inflation, an incrementally less hawkish Federal Reserve, and an economy that has remained fairly resilient (particularly with regard to the labor market). Last year, the Fed aggressively hiked interest rates in an effort to combat high inflation. In February, the Fed once again raised rates – but only by 0.25%, marking the second meeting of slower increases. This comes after 0.5% at the last meeting, compared to a steep 0.75% at the four consecutive meetings before that.

Markets also received positive signals from developments outside of the US. Other factors boosting investor confidence include better-than-expected European growth and forward-looking indicators and a re-opening in the Chinese economy.

Whereas equities came out of the gate strong, bond markets had a more neutral start to the year. Bond investors face the difficult challenge of trying to navigate an environment of inflation that’s still high, but coming down, and Fed that is still tightening, but at a slowing pace, and an economy that has been resilient, but is clearly slowing. All of this amounted to a modest yield of 3.51% on the US 10-Year Treasury.

Our Perspective

There’s a lot to digest after 2022’s volatility and January’s strong start.

Investors are currently looking at a very uncertain future. Forward looking indicators like the yield curve are indicating a potential recession looming in the distance. The Fed is hiking, but the pace of hikes is slowing alongside cooling inflation. Nevertheless, inflation remains well above the Fed’s target and services inflation remains incredibly sticky.

What we are seeing is the opportunity to be tactical and calculated. There’s a plethora of factors influencing financial markets, but by adhering to our processes, we believe we will be able to filter out the noise and take advantage of opportunities as they present themselves.

What’s to Come in 2023?

So, what comes next? Right now, our market and economic outlook is cautious, and we believe a recession is likely. At the very least, slowing growth and easing inflation will pressure companies’ top-lines. Our outlook will evolve over time, and at some point, we will become less cautious. We are also well aware of the fact that markets will move ahead of a turn in the data. Our teams are already preparing for that eventuality, conducting work on more cyclical, ‘recovery’ areas of the economy. We are laying the groundwork today for whatever comes tomorrow.

Read our complete outlook, Setting the Stage for the Next Act.

For Financial Professionals,

Preparing for a Recession

In our outlook, we share our view that a recession is the most likely outcome at this point in the economic cycle. No one has a crystal ball to know for certain if, or when, a recession will occur, but with an elevated likelihood of it happening, there are five things to know about recessions and their effect on the market.

1. What is a recession
2. What are the warning signs of a recession
3. Are the recessions the same as a bear market?
4. What should you do during a recession?
5. What comes after a recession?

Find the answers to each in our latest article, 5 Things to Know About Recessions.

Our View

• Economic Cycle
• The economy is late cycle; a recession in the US is becoming increasingly likely; the Fed is on a warpath against inflation, as it found itself badly behind the curve in 2022 and is being forced by high and persistent inflation to tighten into an already weakening economy
• Stock Market
• US stock market volatility continues; market weakness has improved valuations, however, equities are not cheap by longer-term historical standards; valuations may be partly explained by robust corporate profitability, as EBIT margins have climbed to historical highs; rising input costs are posing a risk to the ability of corporations to maintain this elevated level of profitability; returns will be harder to come by and stock selection will be increasingly important
• Bond Market
• Interest rates have risen well off their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads have widened, but not enough to make them materially more attractive at this time
• Important Issues on the Radar
• Inflation: a confluence of massive policy stimulus, tight labor markets, gummed-up supply chains, and rising energy costs have caused inflationary forces to broaden and become more entrenched than previously expected
• Ukraine-Russia War: an environment of elevated geopolitical risk entails a general risk-off environment, lending upward support to the dollar, gold, and commodity prices
• China’s Economy: China has pivoted on the two key economic issues that acted as severe headwinds to growth over the last two years; we will now have to see how strong and sustainable the rebound in growth will be

Sources: Wall Street Journal, Bloomberg

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.