Market Update

Market Update

Aaron Soderstrom


February 9, 2023

Market Update


  • Despite the considerable set of headwinds, margins in aggregate have remained steady at 11.2%, with robust nominal growth continuing to boost revenues.
  • Labor market is still tight.
  • Inflation is still high, but shows signs of cooling.

The week in review

  • Unemployment rate decreased to 3.4%
  • Hourly earnings: +0.30% m/m; +4.4% y/y

The week ahead

  • University of Michigan consumer sentiment (prelim.)
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Primary Economic Drivers

With growth reversing the trend and climbing, equity markets become a “risk on” the environment. This change in macroeconomic factors changing gear should come with a warning. The business cycle is in the imminent recession stage, quickly approaching a recession. This increase in growth will be short-lived.

Risk Free

The Equity market continues to be hyper-sensitive to the dollar index. If the U.S. dollar continues to fall, this equities rally can continue. However, if the dollar begins to gain strength because of weakness in the E.U., then the market should have reached a top and reverse. From a tactical perspective, we need to focus on the path of the U.S. Dollar.

Domestic Equities Small Value High Yield Investment Grade Treasuries Commodities
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Equity markets continue to fight the macro environment, moving up while the business cycle suggests that it should be falling. This is because we are in the very late stages of an imminent recession where lower inflation (typically a bad sign) is giving hope that the Federal Reserve will pull off a miracle with a soft landing. A soft landing is highly unlikely to do the long and variable lags in monetary policy and the fact that rates of 4.25% are still not yet at a neutral rate estimated to be higher than 5%.

Economic Growth

4Q22 real GDP showed the economy grew by a 2.9% annualized rate and 1.0% for the calendar year, even with the economy contracting for two consecutive quarters in the first half. While the overall print looked solid, the underlying details still point to a weakening economy. More than half of the GDP gain came from an increase in inventory accumulation (a trend that will inevitably be reversed), real consumer spending was softer than expected, and residential investment plunged further. Looking ahead boosts in real personal income, pent-up demand for autos, and a very tight labor market should keep growth afloat, but very modest, in the year ahead.

Our daily growth factor also confirms that growth slowing is not stalling; since November of 2022, growth has started to accelerate despite the pressures added by higher interest rates. Despite the increase in economic growth, our base case is that growth will continue to slow as we enter 2023 inching toward a recession at a methodically slow pace.


The 4Q22 earnings season is underway, with 250 companies having reported (70.6% of market cap). Our current estimate for 4Q22 earnings per share is $50.48, representing a y/y decline of 11.0% and flat q/q growth of 0.3%. So far, 64% of companies have beaten earnings expectations, while 51% have beaten revenue expectations.


The January Jobs report was much stronger than expected with a 517K increase in payroll jobs and a decline in the unemployment rate to 3.4%. Gains were strongest in leisure and hospitality, healthcare and professional business services. Importantly, even at these low levels of unemployment, tightness is not contributing to a rebound in wage inflation, with wage growth moderating to 0.3%. The impact of seasonal adjustments for January may be overstating the job gains, but the labor market is clearly still a bastion of strength in an economy with elevated recession risks.


The December CPI report confirmed that the inflation surge of 2022 is fading as headline CPI fell 0.1% m/m and 6.4% y/y, while core CPI rose by 0.3% m/m. Lower energy prices and moderating food prices continued to help lower headline inflation, while CPI ex-food, energy and shelter fell for the third consecutive month due to falling vehicle prices, lower health insurance rates and lower airline fares. Shelter inflation increased 0.8% m/m, partially offsetting the decline in inflation. Headline PCE inflation also slowed, rising just 0.1%, while Core PCE inflation ticked up to 0.3%.


At its January meeting, the FOMC hiked rates at a reduced pace of 0.25% to a range of 4.50%-4.75%. The statement language and press conference were somewhat dovish, acknowledging that inflation pressures have eased but remain elevated. The committee still sees “ongoing increases in the target range will be appropriate,” however, exchanged “pace” with “extent” in determining future hikes, suggesting the Fed may be close to being done. That said, the committee still sees a greater risk in not doing enough to bring inflation back down to 2% than overtightening.

Final Thoughts


  • Fed is likely to push the economy into recession if it overtightens policy in response to supply-driven inflation.

  • Heightened geopolitical tensions with Russia could result in continued energy shortages, low consumer confidence, and dampened growth.

  • Markets may remain depressed and volatile until investors receive clarity on inflation and the Fed.

Investment Themes

  • After the 2022 sell-off, quality fixed income now offers higher yield and more protection against a market correction or economic downturn.

  • Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate environment. Stock pickers beware. We are waiting for the recession before getting back into individual stocks.

  • Long-term growth prospects, a falling dollar and wide valuations discounts support international equities.

Compliance Reference: 398538