Daily Market Notes: 1-3-2023

The market finally put 2022 to rest last Friday with another negative performance, but one that ended well off of the lows. In the process, it ended the worst year for the S&P since 2008, which was nothing to be proud of.

Following doing the opposite from the day before the entire week, the major indices started out the day getting blasted to the downside, with the Dow off by as much as 373 points while the S&P was lower by 49 as the day moved along.

Then in the final hour or so, the feeling was that market makers did not want the embarrassment of a close worse than 20% for the S&P, which would have occurred on anything below 1812, they decided to push things better than the lows going into the close and as a result, things came back from the worst levels which resulted in the Dow ending “only” 73 points down to finish the year at 33,147 hurt by losses in HD and MCD.

The S&P also pushed better into the close and finished above that 1812 level to end with a closing 10 point decline down to 3837 after being at 3800 on the lows as discussed above. This meant that the S&P ended the year with a 19.4% decline. This was only the third annual loss since the financial crisis 14 years ago and a painful reversal for investors after a strong gain of 27% in 2021. It also meant an $8.2 trillion loss in value for the year just ended.

The Nasdaq also came back from its worst levels of the session to finish only nominally lower with an 11 point decline down to 10,466 but since it is loaded with technology stocks, some of which got completely decimated in 2022, it ended the year with a 33.1% downside shellacking.

The Dow did the relatively best with “only” an 8.8% decline due to its weighting with energy and health care issues which had the nerve to end higher, the so-called switch from “growth” names to “value” ones such as AMGN, MRK,TRV, CVX.

Stocks struggled as inflation put increasing pressure on consumers and raised concerns about economies slipping into recession. Central banks raised interest rates to fight high prices. The Federal Reserve’s aggressive rate hikes remain a major focus for investors as the central bank walks a thin line between raising rates enough to cool inflation, but not so much that they stall the U.S. economy into a recession.

The federal funds rate stood at a range of 0% to 0.25% at the beginning of 2022 and closed the year at a range of 4.25% to 4.5% after seven increases. The U.S. central bank forecasts that it will reach a range of 5% to 5.25% by the end of 2023. Its current forecast does not call for a rate cut before 2024.

Rising interest rates prompted investors to sell the high-priced shares of technology giants such as AAPL and MSFT as well as other companies that flourished as the economy recovered from the pandemic. AMZN and NFLX lost roughly 50% of their market value. TSLA and META, the parent company of Facebook, each dropped more than 60%, their biggest-ever annual declines.

Russia’s invasion of Ukraine worsened inflationary pressure earlier in the year by making oil, gas and food commodity prices even more volatile amid existing supply chain issues. Oil closed Friday around $80, about $5 higher than where it started the year. But in between oil jumped above $120, helping energy stocks post the only gain among the 11 sectors in the S&P 500, up 59%.

China spent most of the year imposing strict COVID-19 policies, which crimped production for raw materials and goods, but is now in the process of removing travel and other restrictions. It is uncertain at this point what impact China’s reopening will have on the global economy.

The Fed’s battle against inflation, though, will likely remain the overarching concern in 2023 as investors will continue searching for a better sense of whether inflation is easing fast enough to take pressure off of consumers and the Fed.

If inflation continues to show signs of easing, and the Fed reins in its rate-hiking campaign, that could pave the way for a rebound for stocks in 2023 as the Fed has been the overhang on this market since November of last year, so if the Fed pauses and we don’t have a major recession, this could lead to a better year for equities.

Bond yields mostly rose, as the 10-year Note gained up to 3.88% from 3.82% late Thursday while the 2-year was at 4.40%. Although bonds typically fair well when stocks slump, 2022 turned out to be one of the worst years for the bond market in history, thanks to the Fed’s rapid rate increases and inflation.

Companies in the S&P are expected to broadly report a 3.5% drop in earnings during the fourth quarter, according to FactSet. Analysts expect earnings to then remain roughly flat through the first half of 2023.

Earnings this week include: Thursday – CAG, STZ and Dow component WBA.

Economic reports will have: today – November construction spending gained 0.2%; Wednesday – minutes from December F.O.M.C. meeting, November JOLTS survey, ISM December Manufacturing Survey; Thursday – weekly jobless claims; Friday – November factory orders, December ISM Services Index report, December non-farm payrolls report for which the estimate is 218,000 versus 263,000 the prior month with the unemployment rate remaining at 3.7%.

Donald M. Selkin

Chief Market Strategist


 Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.