Investment Monthly February | 2023 - JOHN LYNCH Chief Investment Officer
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Investment Monthly February | 2023 JOHN LYNCH Chief Investment Officer ©2023, Comerica Bank. All rights reserved.
Policy Federal Debt Held by the Public
(CBO, % of GDP)
115
DEBT CEILING DEBATE LOOMS 110
Economic data and market performance conspire against Fed’s 105
inflation fight. 100
95
• As the 118th Congress recently convened, the clock immediately started 90
ticking relative to the U.S. Government’s ability to service its debt, which 85
tallies to slightly more than $31 trillion. 80
• The non-partisan Congressional Budget Office (CBO) estimates that the 75
debt held by the public, the amount the U.S. must pay creditors (not
including fixed payments such as Social Security and Medicare) equates to
~100.0% of U.S. GDP and is projected to steadily climb over the next
decade. Source: Bloomberg L.P.
• Given the Federal Reserve’s interest rate tightening campaign this past
year, debt service costs are rising at an alarming rate, particularly when Federal Funds Rate
considering that approximately 50.0% of U.S. debt matures within the next 5.00
three years. 4.50
• Recent economic data has largely reflected the efficacy of monetary policy, 4.00
3.50
as reports on housing, consumption, manufacturing, and leading indicators
3.00
all point to contraction. The January Employment Report, however, showed
2.50
a surge in payroll growth, complicating the Fed’s efforts to fight inflation by
2.00
weakening demand growth.
1.50
• The performance of stocks, bonds, and gold in recent months also suggests 1.00
an easing of financial conditions. Consequently, Fed Chair Jerome Powell 0.50
raised rates by 0.25% at the last FOMC meeting and indicated a “couple 0.00
more” hikes were likely in the coming months.
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 2Economy Economic Forecasts
OUTPUT GROWTH PROVES RESILIENT 2021 2022 2023
Some trends are weakening, but employment gains could
pressure wage inflation. U.S. Real GDP 5.90 1.90 0.40
• U.S. real GDP rose at a faster than expected 2.9% annual pace in the fourth
Consumer Price Index 4.70 8.10 4.10
quarter, more than twice consensus projections.
• Comerica Bank Chief Economist Bill Adams notes that while the headline
Unemployment Rate 5.40 3.70 4.00
was quite good, nearly all the upside surprise was from non-core
components, including an inventory build, a drop in imports, and an increase
in government spending. He continues to project fractional growth in GDP 10-Year U.S. Treasury Note 1.44 2.97 3.50
this year.
Source: Comerica Bank
• Inflation measures have been trending down from peak levels, though the
“stickiness” of wages, rent, and housing costs suggest price pressures may
persist in the months and quarter ahead. The Consumer Price Index eased Net Change in Non-Farm Payrolls
for the sixth consecutive month in December, registering 6.5% year-over- Seasonally Adjusted in Thousands
year (YOY) growth. 1000
900
• After five consecutive months of moderating growth, U.S. companies added
800
517,000 jobs in January, more than 2.5 times the consensus expectation, 700
bringing the unemployment rate down to 3.4%, a 53-year low. Average 600
hourly earnings (AHE) rose 4.4% on a year-over-year (YOY) basis, down 500
from December’s 4.8% pace. 400
300
• To be sure, a tight labor situation sets the stage for future wage pressures,
200
complicating the Federal Reserve’s battle against inflation. 100
0
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 3Fixed Income
Fixed Income
Yield Jan % QTD % YTD % 1YR %
Aggregate Index 4.30 3.08 3.08 3.08 -8.30
MARKET PERFORMANCE AS OF 1/31/2023 Treasuries (1-10 yrs) 3.90 1.60 1.60 1.60 -5.02
Bonds rally to start the New Year Treasuries (10+ yrs) 3.72 6.41 6.41 6.41 -21.24
• A combination of dismal 2022 performance, moderation in some Corp - Inv Grade 4.96 4.01 4.01 4.01 -9.40
economic data, and inflation pressures easing off their peaks, enabled Corp - High Yield 8.14 3.81 3.81 3.81 -5.59
the fixed income markets to regain some sorely needed traction in
MBS Pass-through 4.28 3.29 3.29 3.29 -7.42
January.
TIPS 4.03 1.83 1.83 1.83 -7.87
• Indeed, the broadest measure of the fixed income market, the
Muni - Inv Grade 3.10 2.87 2.87 2.87 -3.42
Bloomberg Aggregate Index, declined ~14.0% in 2022 before gaining
more than 3.0% last month. Muni - High Yield 5.44 4.44 4.44 4.44 -6.80
• Longer-term U.S. Treasuries helped drive the gains for the Index, as the USD Emg Mkts Debt 7.02 3.20 3.20 3.20 -10.19
yield on the benchmark 10-year U.S. Treasury Note fell by ~30 basis Source: Bloomberg L.P.
points during January, driven lower by moderating pricing measures
along with hopes that the Federal Reserve would soon end its tightening 2-Year U.S. Treasury Bill
campaign and possibly begin easing policy as soon as this fall.
5.00
• The gains were broad based in the bond market last month, as both 4.50
investment grade and high yield bonds, in the taxable and tax-exempt
4.00
space, saw declining yields.
3.50
• While the U.S. Treasury yield curve continues to point toward recession, 3.00
the corporate spread sectors suggest mild weakness. We continue to
2.50
favor quality with investment grade portfolio positioning in the corporate
and municipal spaces. 2.00
1.50
• Regarding market expectations for Fed policy, we’ll continue to pay close
1.00
attention to the yield on the 2-year Treasury bill.
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 4Equities
Equities
Price Jan % QTD % YTD % 1YR %
Dow Industrials 34,086.04 2.93 2.93 2.93 -1.69
MARKET PERFORMANCE AS OF 1/31/2023
Last year’s laggards are this year’s leaders. S&P 500® 4,076.60 6.28 6.28 6.28 -8.86
Nasdaq Composite® 11,584.55 10.73 10.73 10.73 -18.53
• While bear markets typically signal a shift in leadership, investors usually
put up a fight, returning to prior leadership in hopes that improved Russell 2000® 1,931.95 9.75 9.75 9.75 -4.46
valuations may be enough to signal the next bull market. Unfortunately,
Russell 3000® Growth 1,860.64 8.44 8.44 8.44 -16.14
history responds with enticing bear market rallies, lasting around two
months and climbing approximately 15.0%. Russell 3000® Value 2,067.24 5.43 5.43 5.43 -1.23
• We believe we are in the second bear market rally of the past year. The MSCI EAFE® 2,100.44 8.12 8.12 8.12 -3.43
first rally lasted from mid-June to mid-August, while the second began in
mid-October and is still showing signs of life. Though the current bear rally MSCI EM 1,031.50 7.90 7.90 7.90 -12.29
has exceeded the typical timeframe, the magnitude of the gains has been Source: Bloomberg L.P.
consistent with historical precedent.
• Of course, we’ve seen examples whereby the equity market can climb S&P 500® Sectors
higher, particularly with an inverted yield curve. The two top examples Price Jan % QTD % YTD % 1YR %
witnessed a 25.0% gain in the S&P 500® Index, concluding in 1980 and Communication Svcs 182.04 14.50 14.50 14.50 -27.54
2007. Needless to say, the ensuing years were difficult for equity investors, Cons Discretionary 1,156.22 15.02 15.02 15.02 -20.31
while also confirming the need to respect the message from the bond Cons Staples 770.91 -0.89 -0.89 -0.89 -0.07
market.
Energy 690.59 2.81 2.81 2.81 37.91
• January’s equity market performance, though enjoyable, may not be built Financial 607.90 6.86 6.86 6.86 -5.84
on the fundamental foundation that many traders hope. Growth
Health Care 1,553.43 -1.87 -1.87 -1.87 2.89
outperformed value, and lesser-quality small caps gained traction against
Industrials 861.96 3.72 3.72 3.72 1.42
higher quality large caps.
Info Tech 2,373.29 9.32 9.32 9.32 -15.90
• Sector performance was also reflective of this pattern last month, as last
Materials 533.40 8.98 8.98 8.98 0.94
year’s laggards became this year’s leaders.
Real Estate 255.26 9.90 9.90 9.90 -10.71
Utilities 351.17 -2.00 -2.00 -2.00 4.23
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 5Equities
Average S&P 500® Performance since 1950
14%
12.05%
12%
PRESIDENTIAL CYCLE OFFERS HOPE 10%
8% 7.19% 7.11%
We expect a bumpy ride in 2023, with the major indexes
5.59%
firming by yearend. 6%
4.23%
4%
• As we wrote after the midterm elections, the third year of the presidential
cycle tends to be favorable for the equity markets, as the sitting 2% 0.67%
0.14%
president typically has lost seats and employs spending to boost 0%
economic prospects. Given this dynamic since WWII the third year of the -2% -0.91%
election cycle has never experienced recession. Year 1 Year 2 Year 3 Year 4
• Equity market performance in January is reflective of this trend, with the January February through December
S&P 500® essentially performing in line with this historical trend.
Source: Bloomberg L.P.
• We remain concerned, however, that the current market technicals are
not being supported by the fundamentals. Indeed, the S&P 500® is up
S&P 500® Index
~15.0% from the mid-October lows, while monetary policy remains
steadfast and corporate profit margins are under pressure. 4800
4600
• Our base case calls for mild recession, steady market interest rates, and
4400
a retest of the October lows (~3,500) in the S&P 500® Index, before
investors price in a policy response and begin discounting recovery in 4200
late 2023 and early 2024. This scenario should experience flat profits in 4000
2023 and expectations of 5.0% earnings gains in 2024, and we would 3800
view the S&P 500® as fairly valued in the range of 4,100-4,200 by 3600
yearend. 3400
S&P 500 50-DMA 200-DMA
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 6Global
China GDP - Annual Growth Rate %
16.00
14.00
WARM WINTER SUPPORTS EUROPE 12.00
China reopening may see rise in virus cases and inflation. 10.00
8.00
▪ The surprise announcement to ease Covid-related restrictions at the end of
6.00
the year boosted hopes for renewed global momentum, as the Chinese
economy expanded at only 3.0% in 2022. This compares to projections of 4.00
5.5% at the start of last year, though it remains to be seen the degree to 2.00
which inflationary pressures, and Covid-19 cases, increase. 0.00
▪ Consensus expectations call for a return to a 5.0% pace of growth this
year, though the trend over the past 20 years has moderated and slowing
population growth will likely limit upside over the next couple of decades.
Source: Bloomberg L.P.
▪ The Bank of Japan surprised global markets last month by not raising its
benchmark lending rate but maintained its cap of 0.50% on the Japanese
Government Bond (JGB). The BOJ has employed yield curve control to Eurozone Inflation - CPI
cap yields on the JGB, while keeping its policy rate at -0.1%. Global 12.00
markets are skeptical, given Japan’s 4.0% inflation rate, the highest in 10.00
decades.
8.00
▪ A relatively mild winter in Europe has mitigated much of the economic risk
6.00
emanating from Russia’s invasion of Ukraine, as energy price growth
moderated in recent months. 4.00
▪ Nevertheless, Eurozone inflation remains alarmingly high, and the 2.00
European Central Bank (ECB) recently raised its target lending rate by 0.00
0.50%, to 2.5%, and emphasized further hikes were coming in 2023.
-2.00
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 7Currency & Commodities
Currency and Commodities
Price Jan % QTD % YTD % 1YR %
MARKET PERFORMANCE AS OF 1/31/2023 USD 102.10 -1.38 -1.38 -1.38 5.93
Dollar weakness continues, supporting commodity prices. Euro 1.09 1.48 1.48 1.48 -3.63
GB Pound 1.23 1.96 1.96 1.96 -8.89
• In January, the U.S. dollar continued its downward path from the October
2022 peak as global investors bet that moderating inflation will ease Yen 130.09 -0.79 -0.79 -0.79 13.41
pressure on the Federal Reserve, limiting interest rate differentials
thereby supporting investment elsewhere. Gold 1,928.36 5.72 5.72 5.72 7.06
• Consequently, most major global currencies caught a bid last month, Copper 422.60 10.90 10.90 10.90 -4.69
except for the Japanese yen, which still hovers near four-decade lows as
the BOJ insists on accommodative policies despite soaring inflation. WTI 78.87 -1.73 -1.73 -1.73 -10.58
• Gold has been a primary beneficiary of dollar weakness in the Source: Bloomberg L.P.
commodity space, as a combination of safe-haven strategies and
emerging central bank purchases push the yellow metal back toward all- Gold
time highs.
2200
• Copper has also benefitted from less than feared global economic data,
2000
and China’s reopening also supports the industrial metal known as “Dr.
Copper” for its ability over time to predict global growth trends. 1800
• While oil prices continue to battle against supply fears and geopolitical 1600
tensions, the International Energy Agency suggests that oil demand 1400
should hit a record level this year to 101.7 million barrels a day as China
1200
reopens, bringing demand back above pre-pandemic levels.
1000
Gold 50-DMA 200-DMA
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 8Disclosure Comerica Wealth Management consists of various divisions and affiliates of Comerica Bank, including Comerica Bank & Trust, National Association; Comerica Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Comerica Securities, Inc. is a federally registered investment advisor. Registrations do not imply a certain level of skill or training. Securities and other non-deposit investment products are not insured by the FDIC; are not deposits or other obligations of, or guaranteed by, Comerica Bank or any of its affiliates; and are subject to investment risks, including possible loss of the principal invested. Comerica Securities, Inc. is a broker/dealer and member FINRA/SIPC. Insurance products are offered through subsidiaries of Comerica Bank, including Comerica Insurance Services, Inc. and its affiliated insurance agencies. Insurance products are not insured by the FDIC or any government agency; are not deposits or other obligations of or guaranteed by Comerica Bank or any of its affiliates; and are subject to investment risks, including possible loss of the principal invested. Insurance products are solely the obligation of the issuing insurance company; are not guaranteed by any person soliciting the purchase of or selling the policies; and Comerica is not obligated to provide benefits under the insurance contract. Not all products available in all states. Variable annuities are made available through Comerica Securities, Inc. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation. Comerica Bank is an Equal Opportunity Lender. Comerica Bank NMLS ID 480990 Unless otherwise noted, all statistics herein obtained from Bloomberg. This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel. The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not be suitable for all clients. The S&P 500®® Index, S&P MidCap 400 Index ®, S&P SmallCap 600 Index ® and Dow Jones Wilshire 500® ® (collectively, “S&P ® Indices”) are products of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and Standard & Poor’s Financial Services, LLC and has been licensed for use by Comerica Bank, on behalf of itself and its Affiliates. Standard & Poor’s ® and S&P ® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones ® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The S&P 500® ® Index Composite is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product nor do they have any liability for any errors, omissions, or interruptions of the S&P Indices. “Russell 2000® Index and Russell 3000® Index” are trademarks of Russell Investments, licensed for use by Comerica Bank. The source of all returns is Russell Investments. Further redistribution of information is strictly prohibited. comerica.com/insights ©2023, Comerica Bank. All rights reserved. 9
Thank You ©2023, Comerica Bank. All rights reserved. 10
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