Perspective :

Market Commentary | February 21, 2023

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Good news is bad news once again

Just past the halfway mark for the month, stocks have given up early gains as investors yet again process better-than-expected economic data. Retail sales for January were anticipated to be higher by about 2%, but the actual numbers reflected a 3% month-over-month growth rate. And that wasn’t simply because of inflation; real/inflation-adjusted retail sales also grew. That, on top of the 10th straight month of higher-than-expected job growth numbers, has pulled market participants kicking and screaming to the camp of higher interest rates for longer, shunning risk assets along the way. The market implied terminal Fed Funds rate now stands at 5.3%, 40 basis points higher than where it began the month.


Even as the consumer has been happily spending on everything from vehicles to clothing to dining out, as reported by The Wall Street Journal, real wages have continually been outpaced by inflation across developed markets, a trend that is expected to continue in 2023.


As labor, materials, and energy costs continue to dent profit margins, according to FactSet, S&P 500® companies’ fourth-quarter net profit margins should still come in at around 11.3%, a very healthy level by historical standards. And according to Goldman Sachs, this earnings season produced a much-reduced number of recession warnings from corporate executives. Again, reflecting strong economic data that suggests the onset of a potential recession is being pushed further into the future.


Through the close on the 17th, growth stocks had been in the driver’s seat for the month, with the tech-heavy NASDAQ up over 2%, but as mentioned above, today’s market action erased those gains, and now all major equity indices are in the red for the month. Like much of 2022, there has been nowhere to hide this month, as all major bond indices have also retreated. Long-term Treasuries have sold off by almost 4%, investment grade corporates are lower by 2.4%, and TIPS are down 1.1%. Indeed, the euphoria of January has given way to a more subdued outlook for capital markets, and investors should be prepared for more turbulence as the Fed crafts its endgame.

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U.S. Large Cap Equity S&P 500 Represents US large company stocks.
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