By: Dave Chenet, CFA, CAIA®
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.49%|
Source: YCharts, Yahoo! finance
US Markets rallied this week with all three major indices posting gains on the back of a better-than-expected Q4 ’22 GDP report and corporate earnings. On the economic data front, the initial estimate of 2022 Q4 growth was 2.9%, beating estimates and the PCE price index reported a 5% gain from December ’21 – slightly below expectations and the lowest reading since September 2021. Notable earnings beats on the week included Tesla and American Express. Intel and Chevron missed their respective estimates.
Looking forward, all eyes will be on the Federal Reserve’s meeting next week. It is widely expected that it will announce an increase in the Federal Funds rate of 0.25% to 4.5%-4.75%. The market is currently pricing just a 1.9% chance that the Federal Reserve will increase by 0.5% and a 0% likelihood that the Fed won’t hike at all. This is down from a 40% likelihood of a 0.50% hike at the start of the year, reflecting the broadly lower inflation readings that have been reported in January.
Looking more broadly, the yield on the U.S. 10-year bond peaked on October 24th at 4.25% and has retreated to 3.5%. This decrease in yields has boosted the price of both bonds and stocks with cyclical assets, such as Emerging Market stocks, European Stocks and US Small-Cap/Mid-Cap and Value outperforming the broad market. Markets will pay close attention to the Federal Reserve next week for their cue on whether this rally can continue with a more acquiescent Fed, or if Jerome Powell & co will maintain the position that rates will remain high for some time.
What We’re Reading:
Chart of the Week:
A strong January (5%+ return) after a negative year has historically been positive for full-year S&P 500 performance, with the market positive in each of the last five instances and an average return of almost 30% for the year.
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