Investment Monthly January | 2023 - JOHN LYNCH Chief Investment Officer
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Investment Monthly January | 2023 JOHN LYNCH Chief Investment Officer ©2023, Comerica Bank. All rights reserved.
U.S. Federal Budget Deficit as % of GDP
0
Policy -2
-4
118th Congress Struggles at the Start
-6
-8
-10
Narrow margins suggest few material developments in fiscal -12
-14
policy initiatives next year.
-16
• Both the length of time and the lack of cooperation in selecting the -18
Speaker of the House likely portends further challenges ahead for -20
consequential budget and legislative items.
• Unfortunately, this environment will likely be accompanied by rising
interest expense on federal debt, limiting the opportunity for fiscal policy Source: Bloomberg L.P.
and discretionary spending to help offset any economic difficulties in the
months and quarters ahead. Federal Funds Rate
• This is important because after a period of improvement, the federal 5.00
budget deficit as a percentage of GDP is starting to widen again as the 4.50
U.S. Treasury paid out more than $100 billion in interest expense in 4.00
October and November. 3.50
• The Federal Reserve raised its target for the federal funds rate seven 3.00
times last year, most recently by 0.50% at the monetary policy meeting 2.50
2.00
on December 14th. The benchmark overnight lending rate now stands in
1.50
a range of 4.25% to 4.50%.
1.00
• While Fed Chair Jerome Powell suggested the magnitude of future rate 0.50
hikes could be smaller, recently released minutes of that policy meeting 0.00
indicate the FOMC is concerned about the market’s lack of belief in their
steadfastness could become a challenge this year.
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 2Economic Forecasts
Economy 2021 2022 2023
Recession Likely in Early 2023 U.S. Real GDP 5.9 1.9 -0.2
Though we expect to get some relief from high inflation. Consumer Price Index 4.7 8.1 4.2
• Comerica Bank Chief Economist Bill Adams projects a weak start to the
year, with falling output in each of the next two quarters. Unemployment Rate 5.4 3.7 4.4
• While the U.S. economy firmed in the third quarter, many recent data
points are flashing weakness, including housing, manufacturing, and 10-Year U.S. Treasury Note 1.44 2.97 3.7
services.
Source: Comerica Bank
• Bill Adams points out that despite low unemployment, continuing claims
for weekly jobless benefits have been steadily climbing, up more than
Average Hourly Earnings - YOY
25.0% over the past six months. In previous instances where continuing
9.00
claims have risen at this pace, the economy has ended up in recession.
8.00
• Though inflation was a significant problem in 2022, we look for an easing
of price pressures from peak levels. Supply chains are working better, 7.00
business inventories have caught up, and pandemic-related shortages 6.00
are largely resolved. 5.00
• The December jobs report was stronger than expected, with solid job 4.00
growth (+223K) and the unemployment rate (3.5%) falling back to a half- 3.00
century low. Moreover, average hourly earnings rose a less than forecast
2.00
0.3% last month, bringing wage growth down to 4.6% YOY, well below
1.00
the peak rate of 5.6% YOY in March 2022.
0.00
Dec- Mar- Jun-20 Sep- Dec- Mar- Jun-21 Sep- Dec- Mar- Jun-22 Sep- Dec-
19 20 20 20 21 21 21 22 22 22
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 3Fixed Income
Yield Dec % QTD % YTD % 1YR %
Fixed Income
Aggregate Index 4.68 -0.45 1.87 -13.01 -13.01
Treasuries (1-10 yrs) 4.20 -0.24 1.02 -7.77 -7.77
Market Performance as of 12/31/22 Treasuries (10+ yrs) 4.08 -1.70 -0.59 -29.26 -29.26
Corp - Inv Grade 5.42 -0.44 3.63 -15.76 -15.76
After a difficult year, income can play an important role for Corp - High Yield 8.96 -0.62 4.17 -11.19 -11.19
60/40 portfolios in 2023. MBS Pass-through 4.71 -0.44 2.14 -11.81 -11.81
• Inflation surging to a four-decade high and the aggressive response from TIPS 4.38 -1.02 2.04 -11.85 -11.85
the Federal Reserve resulted in a difficult environment for fixed income Muni - Inv Grade 3.55 0.29 4.10 -8.53 -8.53
investors last year, with the Bloomberg Aggregate Bond Index down Muni - High Yield 5.83 -0.16 3.48 -13.10 -13.10
13.0% in 2022, its worst performance since 1976. USD Emg Mkts Debt 7.52 0.85 6.59 -15.26 -15.26
• Long-term U.S. Treasury bonds struggled the most last year, as their high Source: Bloomberg L.P.
interest rate sensitivity (duration) weighed on bond prices as the Federal
Reserve raised the federal funds rate to a range of 4.25% to 4.50%.
Corporate Credit Spreads
• While equities periodically rallied on hopes that the Fed would conclude
7.00
its tightening cycle, the bond market was having none of it, as the U.S.
6.00
Treasury yield curve remained inverted throughout the second half of
2022, typically a market signal pointing toward looming recession. 5.00
• Corporate credit spreads, however, remained within their long-term 4.00
averages, suggesting confidence in the ability of investment grade and 3.00
high yield credits to withstand the upcoming economic weakness. 2.00
• We believe fixed income investors have likely seen the worst of price 1.00
depreciation and can now look for improved yields to contribute to total 0.00
return. Indeed, for all the concern expressed last year about the durability
of balanced (60/40) portfolios, we believe coupons can now be an
effective source for income and portfolio stability going forward. IG HY
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 4Equities
Price Dec % QTD % YTD % 1YR %
Equities Dow Industrials 33,147.25 -4.09 16.01 -6.86 -6.86
S&P 500®
Market Performance as of 12/31/22
3,839.50 -5.77 7.55 -18.13 -18.13
Nasdaq Composite® 10,466.48 -8.66 -0.78 -32.51 -32.51
Russell 2000® 1,761.25 -6.49 6.20 -20.46 -20.46
Higher market interest rates led to regime change in equity
Russell 3000® Growth 1,716.80 -7.58 2.31 -28.97 -28.97
market leadership.
Russell 3000® Value 1,963.29 -4.20 12.16 -8.01 -8.01
• Perhaps best describing the challenging equity markets in 2022, the S&P 500®
Index peaked on just the second trading day of the year before slipping into a MSCI EAFE® 1,943.93 0.11 17.40 -13.92 -13.92
bear market within the next few months. Volatility was pervasive, and the Index
MSCI EM 956.38 -1.51 9.62 -19.94 -19.94
experienced more than 120 trading days with moves of +/- 1.0%.
Source: Bloomberg L.P.
• The surge in market interest rates pushed equity valuations lower, particularly in
the growth, technology, and “tech-like” names within Communications and
Consumer Discretionary sectors. Energy was the only sector to escape investors’ S&P 500® Sectors
wrath, despite oil’s inability to sustain early year strength. Hopes for a Santa Price Dec % QTD % YTD % 1YR %
Claus Rally faded in the waning sessions of December, and the S&P 500® Communication Svcs 159.37 -7.84 -1.38 -39.89 -39.89
finished the year around 3,940 – within range of our 2022 fair value estimate. Cons Discretionary 1,005.48 -11.26 -10.18 -37.03 -37.03
• Value outperformed growth and domestic indicators were mixed relative to their Cons Staples 779.13 -2.82 12.72 -0.62 -0.62
international equity market counterparts.
Energy 672.34 -2.99 22.74 65.43 65.43
• The “barbell risk” sector strategy emphasizing Energy and Health Care also fared
Financial 569.74 -5.27 13.56 -10.57 -10.57
relatively well in a difficult environment for equities.
Health Care 1,585.54 -1.91 12.80 -1.95 -1.95
• Another indication of leadership regime change was that higher rates led to not
Industrials 831.40 -3.00 19.18 -5.51 -5.51
only value outperforming growth, but relative outperformance of the average
stock relative to the benchmark index. The S&P 500® Equal Weight Index Info Tech 2,172.17 -8.37 4.74 -28.19 -28.19
outperformed the S&P 500® Cap Weight Index by approximately 800 basis points Materials 489.55 -5.56 15.05 -12.28 -12.28
last year. Real Estate 232.37 -4.83 3.82 -26.21 -26.21
Utilities 358.48 -0.53 8.64 1.56 1.56
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 5S&P 500® Sector EPS
Sector 4Q22 2022 2023
Equities
Communication Services -19.0% -14.8% 9.3%
Consumer Discretionary -20.3% -14.0% 33.7%
Consumer Staples -3.3% 1.8% 4.1%
Adieu, 2022 and Hello, 2023! Energy 62.7% 150.6% -13.4%
Financial Services -12.2% -17.3% 14.4%
Heath Care -9.5% 3.2% -4.3%
We expect further volatility in first half, before investors price Industrials 38.5% 27.1% 13.8%
in recovery in 2Q23. Information Technology -9.5% 3.6% 4.0%
Materials -26.3% 2.9% -11.3%
• The equity markets will likely transition their attention from P/E multiple 9.8% 15.5% 2.4%
Real Estate
contraction in 2022 to margin erosion and a decline in profit forecasts for
Utilities 2.4% 4.9% 6.3%
2023. Since rising market interest rates have pressured P/E multiples,
S&P 500 -4.1% 4.7% 4.8%
investors should begin to reassess the impacts of wages, debt servicing
Source: FactSet
and energy prices on corporate income statements.
• In addition, we’ve consistently viewed consensus profit forecasts as too
optimistic for 2023, though Wall Street’s EPS estimates have begun to S&P 500® Index
decline in recent months. 4900
• Fourth quarter operating earnings per share (EPS) for companies in the 4700
S&P 500 Index are expected to decline by 4.0% on a year-over-year
4500
(YOY), according to FactSet. The first drop in profits since the third
4300
quarter of 2020 will likely set the stage for expense reduction, including
job cuts, in the coming months. 4100
• Our base case calls for mild recession early in the year, steady market 3900
interest rates, and a retest of the October lows (~3,500) in the S&P 500® 3700
Index, before investors price in a policy response and begin discounting 3500
recovery in late 2023 and early 2024. This scenario should experience
flat profits in 2023 and expectations of 5.0% earnings gains in 2024, and
we would view the S&P 500® as fairly valued in the range of 4,100-
4,200 within the next twelve months. S&P 500 50-DMA 200-DMA
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 6Global GDP Forecasts
7 6.6
Global
6
6
5.2
5
Weaker Economic Growth in 2023 4 3.7 3.7
3.2
3 2.7
2.4
Slowing demand, rising inflation, and the strong U.S. dollar all 2
1.1
weigh on international markets. 1
▪ Challenges around the world led by the war in Ukraine, lockdowns in 0
Global Developed Emerging
China, and political uncertainty/instability pressured economic output
and the financial markets in 2022. 2021 2022 2023
▪ The International Monetary Fund reduced its projections for global GDP, Source: International Monetary Fund
indicating that growth would transition from 6.0% in 2021 to 3.2% in
2022 and 2.7% in 2023.
MSCI World Index ex. U.S.
▪ We continue to believe risks to the outlook increase as policy paths
2500
diverge in advanced economies, with the ECB and Bank of Japan
2400
falling further behind the curve on inflation.
2300
▪ Despite the recent reopening, economic weakness in China has been 2200
evident in a variety of indicators, including exports, retail sales, 2100
industrial production, and property values. Dollar strength has further 2000
pressured emerging markets. 1900
▪ As a result, global financial markets struggled last year, though a late 1800
1700
rally in the MSCI All Country World Index (ex. U.S.) offered
1600
encouragement. However, we continue to underweight international
relative to domestic equities in our portfolios and look for this dynamic
to persist until inflation growth, and dollar strength, subside.
MSCI World ex. U.S. 50-DMA 200-DMA
Source: Bloomberg L.P.
©2023, Comerica Bank. All rights reserved. 7Currency and Commodities
Currency & Commodities
Price Dec % QTD % YTD % 1YR %
USD 103.52 -2.29 -7.67 8.21 8.21
Market Performance as of 12/31/22 Euro 1.07 2.87 9.21 -5.85 -5.85
GB Pound 1.21 0.21 8.17 -10.71 -10.71
Second half decline in the U.S. dollar supported Yen 131.12 -5.03 -9.41 13.94 13.94
commodities. Gold 1,824.02 3.14 9.84 -0.28 -0.28
• The U.S. dollar was very strong this past year, with the trade- Copper 381.05 2.17 11.66 -14.63 -14.63
weighted basket index (DXY) enjoying gains of approximately 15%
through the third quarter. Yet, the October CPI Report showed a WTI 80.26 -0.36 0.97 4.25 4.25
slight deceleration in pricing pressures, leading to a sell-off in the Source: Bloomberg L.P.
greenback and igniting a bear market rally in global equities and
other risk assets. U.S. Dollar Index - DXY
• The U.S. Dollar Index (DXY) gave up about half its YTD gains in 115.00
the fourth quarter, though, as global investors bet that the Federal 112.50
Reserve would ease its tightening campaign in the coming year. 110.00
• Consequently, in what had been a troubling year for most 107.50
105.00
commodities, the recent dollar weakness boosted prices for 102.50
industrial and precious metals, including copper and gold. 100.00
• The technical action on gold has been particularly impressive in 97.50
95.00
recent months. 92.50
• We look for a renewed bid for the U.S. dollar in the first half of 90.00
2023 as the Federal Reserve maintains its intended policy path,
and global growth moderates, likely adding to renewed commodity
weakness. DXY 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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