Markets started off the new year with a dose of optimism fueled primarily by the economic calendar, Chinese mobility/policy support, and related monetary policy implications. The jobs report on Friday sent equity markets sharply higher and bond yields lower on the back of a friendly mix of robust job creation and moderating wage growth. U.S. equity markets closed up 1.5% for the week while developed international and emerging markets were up 2.7% and 4.3%, respectively. Bond yields fell sharply taking the 10yr UST to 3.55% while the curve steepened as well. Commodities fell nearly 6% thanks to an 8% decline in crude oil.

Market Anecdotes

• 2022 left the S&P down 18%, due primarily to multiple compression, closing with a P/E multiple of 16.7x, a valuation almost exactly at the 25-year average.
• A painful look back at 2022 shows the Barclays Aggregate Index down 13%, the worst return on record by a factor of 4x, a significant contributing factor to the third worst outcome for a 60/40 portfolio since 1950.
• A strong consumer underpins most bullish/constructive views looking into 2023 – a view bolstered by consumer balance sheets, savings, debt service, and the healthy job market.
• Real personal disposable income grew in the back half of 2022 after declining for five consecutive quarters – a strong potential bullish tailwind for 2023.
• With ISM Services and Manufacturing Indexes both falling below 50 for November, a reminder of the predictive nature and efficacy warrants consideration.
• Freight indices and global PMI survey responses on delivery times and input/output prices continue to illustrate healing supply chains and relaxed pricing pressures. Regardless, Fed officials hit the speaking circuit last week and clearly maintained the higher for longer narrative.
• A look at high yield and bank loan maturities show relatively light refinancing needs over the next two years but a considerably higher level in 2025 and 2026.
• BCA suggested most Chinese tier-1 cities have passed peak Covid infections with the remaining areas tick higher and an expectation of return to normalcy sometime later this spring (March).

Declines in global trade data of small open economies, (Singapore -14%, Taiwan -23.4%) a bellwether for global trade and manufacturing activity, are flashing caution with China reopening, normalizing consumption patterns, and slowing global growth are all contributing.

Economic Release Highlights

• The December jobs report came in stronger than consensus with higher job creation (223,000 vs 200,000) and lower headline unemployment (3.5% vs 3.7%). Labor force participation ticked higher from 62.2% to 62.3%.
• Average hourly earnings growth in December came in below consensus for both MoM (0.3% vs 0.4%) and YoY (4.6% vs 5.0%) readings.
• The November JOLT survey registered 10.458mm job openings, higher than the consensus spot forecast of 10.1mm and above the high end of estimate range of 10.00mm-10.33mm.
• The November ISM Manufacturing Index came in at 48.4, a second consecutive decline but slightly higher than consensus forecast of 48.1 and within the estimated range of 47.5 – 49.0.
• November ISM Services Index surprisingly came in well below consensus estimate (49.6 vs 55.0) and dipped into contraction territory.

November’s J.P. Morgan Global Manufacturing PMI registered 48.6, down slightly from the prior month reading of 48.8.

The Numbers

Disclosures

The information in this report was prepared by Taiber Kosmala & Associates, LLC. Opinions represent TKS’ and IPIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. IPI does not undertake to advise you of any change in its opinions or the information contained in this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.  Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340

The U.S. stock market had a banner year in 2021, with the S&P 500 index up almost 27%. Unfortunately, stocks turned downward on the second trading day of 2022 and kept sliding into a bear market. 1 Stocks in the S&P 500 are classified by 11 different business sectors, each of which responds differently to economic conditions. For example, the information technology sector was very strong in 2021, rising by 33.4%. But it turned south in 2022 and dropped by 22.6% through August. On the other hand, the energy sector, driven by high oil prices, was up during both periods (see chart). Index Weighting Many broad-based indexes, including the S&P 500, are weighted based on market capitalization — the total value of a company’s outstanding stocks. Sectors have different sizes and weighting to begin with, but the weight can change significantly due to performance. The information technology sector, which includes some of America’s largest companies, rose from about 20% of S&P 500 capitalization at the end of 2018 to 29% at the end of 2021, increasing its impact on the index when the sector turned downward. The financials sector dropped from 13.3% to 10.7% over the same period, decreasing its impact on the index.2   Varied Weight and Performance Sector gain or loss, with percentage of S&P 500 market capitalization

Source: S&P Dow Jones Indices, 2022 (data as of August 31). The S&P 500 is an unmanaged group of securities considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.

This means that even if you invest primarily in broad-based funds, you may be more heavily invested (overweight) or less invested (underweight) in a given sector than you realize. If you own more specific funds or individual stocks, your portfolio could be even more overweighted or underweighted.

Some market sectors — such as health care, consumer staples, and utilities — are considered “defensive” and may be good to hold through a bear market or economic recession because businesses in these sectors tend to remain strong regardless of economic conditions. Others — such as information technology and consumer discretionary — may have more growth potential but are more sensitive to economic conditions. Whether it’s appropriate to shift sector allocations in the middle of an economic cycle depends on your individual circumstances and long-term goals.

Sector Funds

One way to shift sector weight in your portfolio is by adding one or more sector funds — mutual funds or exchange-traded funds (ETFs) that focus on stocks of companies in a particular industry or sector of the economy. Because these funds are less diversified, they typically carry a higher level of volatility and risk than broad-based funds and should be considered as a complement to a core portfolio of diversified funds rather than a replacement. 

Although sector funds offer flexibility in fine-tuning your portfolio, it’s important to resist the temptation to chase performance and move assets into “hot” sectors without a more comprehensive strategy. Sector performance is cyclical, and last year’s hot sector can easily turn cold, as can be seen in the ups and downs of technology stocks. Also keep in mind that every business cycle is different, and unexpected events can disrupt regular trends. 

The return and principal value of all investments, including sector funds, fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.

Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 

1) S&P Dow Jones Indices, 2022

2) Siblis Research, 2022

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.