Back to the Soft Landing: January 2023 Market Commentary

Benjamin M. Lavine, CFA, CAIA, RICP
Chief Investment Officer, 3D

Data Source: Bloomberg

To read full market commentary, click here.

January 2023 Highlights:

  • January saw a surge in risk appetite as global equities rallied from the year-end sell-off over signs of disinflationary slowdown that could prompt the end of central bank tightening. Favorable winter and net energy demand reductions also helped European stocks despite an economic slowdown/recession. 4th quarter earnings from beaten-up growth stocks helped drive this month’s high beta rally within the U.S. market as did the classic January effect that tends to see stocks subject to tax-loss harvesting the prior year rebound sharply in January. In January, the MSCI All-Country World Index (ACWI) returned 7.8%.
  • Across major regions, International Developed and Emerging Markets outperformed the U.S. although Emerging Markets saw a month-end sell-off across China and India, giving up some of its earlier leadership. In January, MSCI Europe and MSCI Pacific ex-Japan led major regions, returning 8.7% and 8.6%, respectively, followed by MSCI Emerging Markets (+7.9%). MSCI Japan (+6.2%) and the S&P 500 (+6.3%) lagged major regional performance. The U.S. dollar weakened further from last quarter’s depreciation over prospects of an end to Fed tightening while the rest of the world is viewed as catching up to the U.S. with respect to policy tightening.
  • Within the U.S., small caps benefited from the high beta rally outperforming large caps, while value stocks surprisingly outperformed growth stocks despite the strong performance of speculative growth stocks. The S&P 600 Index returned 9.5% versus 6.3% for the S&P 500. S&P Pure Value outperformed Pure Growth, returning 11.6% versus 3.7%, respectively.
  • Across sectors, beaten-up large cap growth stocks that comprise the majority of sector weightings contributed to the outperformance of Communications and Consumer Discretionary sectors as well as Technology and Real Estate (both 2022 year-end laggards) while defensive sectors such as Consumer Staples, Healthcare and Utilities lagged as did traditional cyclicals such as Industrials and Energy.
  • January was a challenging month for Risk Factor performance as all major risk factors underperformed the broader market. Among Risk Factors, High Quality and Value outperformed High Dividend, Minimum Volatility and Momentum, as the latter three lagged due to the lower risk profile of the underlying holdings. Long/short low volatility and momentum were negative for the month while long/short multi-factor also struggled even though long/short value and quality were positive.
  • The Bloomberg U.S. Aggregate Bond Index rose 3.1% for the month while the Global ex-U.S Aggregate returned 3.5%. The 10-Year U.S. Treasury yield ended the month at 3.5%, down from 3.8% at the beginning of the year, while the 2-10 Year Term structure remains deeply inverted even though inflation expectations implied by breakeven rates between TIPS vs Nominal Treasury yields remain elevated.
  • Non-U.S. bonds and emerging market local currency bonds outperformed, helped by U.S. dollar depreciation over prospects that the U.S. Fed is close to the end on rate hikes while the rest of the world remains behind the U.S. on the inflation front. U.S. high yield benefited from the U.S. equity rally and a drop in interest rates as credit spreads narrowed. The Bloomberg US High Yield Index returned 3.8%, while Bloomberg/Barclays Emerging Market Debt LC returned 4.4%.
  • Within equity alternatives, Real Estate rose sharply recovering from the prior quarter’s sell-off. Precious Metals also rallied over prospects that the Fed was close to ending interest rate hikes. It was a mixed month for commodities as industrial metals rose in conjunction with China reopening from COVID lockdowns, while oil prices were unchanged (even though natural gas saw a sharp sell-off). The S&P GSCI Commodities Index returned -0.1% for the month while the Dow Jones REIT Index rose 10.1%. The S&P GSCI Precious Metals Index rose 5.4% for the month.

To read full market commentary, click here.