Week of January 23, 2023

Last week, the U.S. equity markets saw a pattern that has become all too familiar – news showing a slowing economy causing a series of down days only to be followed by a strong rally to make for a positive or near positive performance on the week.  Last Friday, the Dow gained 1% but still lost 2.7% on the week, while the S&P 500 rose 1.9% on Friday but dropped .07% on the week.  The NASDAQ surged 2.7% on Friday, gaining .6% on the week.

The investment markets in 2022 were focused on inflation and the Federal Reserve’s (Fed) effort to curb inflation by raising interest rates.  That focus seems to have changed in 2023 on whether the U.S. economy will fall into recession in the first half of the year, and what affect a recession would have on the stock market.  History serves a grim reality.  “The S&P 500 has never bottomed before the start of a recession, but it’s not clear yet whether the US economy will actually fall into a downturn,” said Ed Clissold, chief US Strategist at Ned Davis Research, whose firm forecasts a 75% chance that the US will slump into an economic slowdown in the first half of 2023. “Some indicators are telling us that a soft landing isn’t off the table.  All of these cross currents do make it challenging for investors to position in US stocks.” The term “soft landing” refers to the Fed’s ability to successfully raise interest rates enough to reduce inflation but not so much as to push the economy into recession.

This week is chalked full of economic news.  On Monday, the Conference Board reports its Leading Economic Index for December, then S&P Global releases both the Manufacturing and Services Purchasing Managers’ indexes for January on Tuesday.  Both are expected to show continued contraction. On Thursday, the Bureau of Economic Analysis will report fourth-quarter gross domestic product (GDP), which is expected to show a 2.5% annual rate of growth.  Also on Thursday, the Census Bureau will release the durable goods report for December.