January’s return surprised pretty much the entirety of investors including Wall Street. As of month end January 2023 most investors remained unconvinced by last month’s rally sitting on one of the largest money market balances since September 2021. Recall 2022 wiped out TRILLIONS of dollars in market value. Not to mention, January has seen a very rough start for the past 3 years going back to 2020. So it’s easy to see why most missed the January rally – especially if you are a long term investor. Having said that, is it time to put money back to work?
Let’s look at the below charts. What’s interesting is how quickly the markets changed it’s direction despite the abundance of narratives: inflation, war, debt ceiling, etc. Just look at the chart below for year end December 2022 and Month end January 2023:
While the rally is a welcome development, investors should keep a few things in mind as we head deeper into the year:
- Sector strength not market strength. Whatever 2023 brings for the US stock market, its sector leadership is unlikely to resemble last year’s—as January’s performance suggests. On the other hand, relative strength in international markets could continue to benefit from trends such as a weakening dollar.
- Fixed-income focus. Despite the dip in longer-term rates last month, fixed-income investments continue to be compelling, both in terms of outright returns and diversification.
- Sticky inflation and the Fed. As noted, in terms of inflation, “easing” isn’t the same as “evaporating.” And with each month that passes, the Fed continues to show cause for controlling inflation. But will that cause a recession? Will this rally continue?
Last month’s rally caught nearly everyone EXCEPT the aggressive investor by surprise. Most investors are either balanced or long-term investors. And notwithstanding, investors should be aware that the volatility that dominated last year could re-emerge—even if 2023 turns out to be a net improvement from 2022. That means rather than chasing returns, investors should stick with a diversified investment approach that can survive the tough times and position them for long-term success.
This is not saying that we are going to continue to hold so much cash. Many of you are already seeing that we have been trading and rebalancing our portfolios for buying. And even with the January rally, the S&P was up 6%. 2022 saw 16 (sixteen) -1% weekly losses. That is the most going back since weekly charts were tracked!! So don’t get too happy because Murphy’s law is real!
So what are we going to do with this data? We are going to trade into the market but with EXTREME caution considering we are still in the woods as evidenced by the Fed’s action to raise interest rates by .25 bps earlier this week. Our concern…, how much more can households hold up? Eggs are nearly $5 if not more. Bread is nearly $5 if not more. Credit cards are being used more frequently for purchases and we are seeing a rise in mortgage delinquencies which at some point could affect home valuations. So yes, we do like the rally and to some degree already started entering the rally, BUT we will continue to pace ourselves looking more at our client long-term objectives rather than chasing the market.
Thanks for reading, and we’ll talk to you again next month.