Stocks Begin New Year With a Bang as Inflation Slows


Stocks rallied to start the New Year as investors looked for inflation to ease and the Federal Reserve to stop raising interest rates.

The S&P 500 rose 6.2 percent in January, its best monthly performance since October. Some of the gain resulted from bounces in companies that fell sharply in late 2022. That was especially true for consumer discretionaries like Tesla (TSLA), (AMZN) and Carnival (CCL). Traditional media companies including Warner Bros. Discovery (WBD) also led a rebound in the communications sector.

The move began on January 6 after a government report showed unemployment falling more than estimated while pay increased less than expected. That argued against a wage-price spiral driving up inflation. Instead of a dreaded 1970s scenario, investors could now be anticipating something more like 1994 and 1995. That’s when the Federal Reserve defeated inflation without a recession, ushering in the bull market of the late 1990s.

S&P 500 daily chart. Notice the higher low this quarter versus the fourth quarter. Also notice the potential for the 50-day moving average to have a “golden cross” above the 200-day MA.

Further readings seemed to confirm the trend. The consumer price index (CPI) unexpectedly fell on January 12. Price and wage indexes in the fourth quarter gross domestic product also showed lower inflationary pressures.

These lay the groundwork for today’s Fed meeting and policy announcement at 2 p.m. ET. The market widely expects a 25 basis point increase, so attention will likely focus on comments about future policy. Those could appear in either the official statement or Chairman Jerome Powell’s press conference at 2:30 p.m.

Big Movers in January

Top Gainers in the S&P 500 Last Month
Warner Bros. Discovery (WBD)+56%Investors and analysts saw turnaround potential after the media company lost more than half its value in 2022.
Tesla (TSLA)+41%The electric-car maker rebounded from its biggest monthly drop ever after reporting strong orders and saying production could reach 2 million units this year.
Western Digital (WDC)+39%The data-storage company rose on reports of a potential merger. It also benefited from strong results at rival Seagate Technology (STX).
Paramount (PARA)+37%The media company rebounded after losing about half its value last year.
Carnival (CCL)+34%The cruise-ship operator rebounded from a December slide as investors looked for higher prices to boost profits.
Source: TradeStation Data
Top Decliners in the S&P 500 Last Month
Northrup Grumman (NOC)-18%Expectations of reduced government spending weighed on the defense contractor.
Enphase Energy (ENPH)-16%Investors took profits in the solar-energy stock after a 45% rally last year. There were also uncertainties about the strength of residential demand.
Pfizer (PFE)-14%The drug maker fell as investors shunned health-care stocks and Covid-related products weakened.
Archer Daniels Midland (ADM)-11%Worries about biofuel mandates weighed on the grain processor.
NextEra Energy (NEE)-11%The Florida utility issued weak earnings guidance.
Source: TradeStation Data

Sector Watch

The table below shows sector performance last month.

Consumer Discretionaries+15%
Real Estate+9.9%
S&P 500+6.2%
Consumer Staples-1.1%
Health Care-1.8%
Source: TradeStation Data

Key Economic Events in January

Below are some key economic events from last month.

  • Labor report shows potential for a soft landing: Job growth was higher than expected in December and unemployment was lower than projected. Wages still rose less than feared, which suggests inflation may be cooling without a recession. (1/6)
  • Inflation unexpectedly declines: December’s consumer price index (CPI) fell 0.1%, versus estimates for an unchanged reading. It was the third straight month below estimates and the biggest drop since August 2020. (1/12)
  • Consumers feel better as prices ease: January’s consumer sentiment index rose more than expected to a nine-month high. Assessments of the labor market and inflation expectations improved. (1/13)
  • GDP ends 2022 strong amid signs of weakening: Gross domestic product rose 2.9% in the fourth quarter, beating the 2.6% forecast. Some economists said higher inventories and lower consumer spending may indicate a slowdown. (1/26)

What Experts Are Saying

Below are some noteworthy commentaries.

  • Apollo thinks a soft landing could be underway: Apollo Global Management Chief Economist Torsten Slok thinks a soft landing is underway. He cited declining inflation and continued strength in the labor market. The result could be profits declining less than feared, potentially lifting stocks. (1/6)
  • Strategists getting more optimistic? A Bloomberg article cited David Kelly of JPMorgan Asset Management and Ed Yardeni of Yardeni Research, who see rate hikes ending as inflation slows. They also cited extreme levels of pessimism as a potential reason for stocks to move higher. (1/7)
  • Yield curve questioned: Professor Campbell Harvey, who discovered the link between the yield curve and recessions, said the indicator could be wrong now. “All models are simplifications of reality,” he said on CNBC, noting other indicators don’t confirm a hard landing. He added the Fed could trigger a recession by continuing to “overshoot” with rate hikes. (1/9)
  • PC market expected to improve: A Reuters article said IDC and Canalys see a potential recovery in the computer-hardware market late this year. The researchers cited businesses upgrades and the looming end of Windows 10 support. PC makers and semiconductor companies may benefit, they said. (1/11)
  • Can stocks defy lower earnings? LPL Chief Equity Strategy Jeffrey Buchbinder noted that indexes typically drop before profits decline because the market is forward looking. The same can be true as prices bottom, Buchbinder said, forecasting a “solidly positive year.” (1/19)

Popular Futures Contracts in January

S&P 500 E-Mini (@ES)ESH23 (Mar)3/17/23ESM23+5.9%
Nasdaq-100 E-Mini (@NQ)NQH23 (Mar)3/17/23NQM23+10%
Dow Jones E-Mini (@YM)YMH23 (Mar)3/17/23YMM23+2.6%
Russell 2000 E-Mini (@RTY)RTYH23 (Mar)3/17/23RTYM23+9.5%
Source: TradeStation Data

Newsworthy Events This Month

DateEventWhat to Watch For
Federal Reserve meeting & press conferenceRates are expected to rise 25 basis points. What will Jerome Powell signal about future policy?
Non-farm payrollsWill unemployment and wage growth give the Fed reason to pause rate hikes?
Inflation reportThe consumer price index one hour before U.S. markets open could shape interest-rate expectations.
Retail sales, housing indexSeparate reports show retail sales growth in January and homebuilder sentiment in February.
Fed minutesMinutes from the central bank’s 1 Feb. meeting could provide clues on future policy.

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