Market Commentary: Week of January 3, 2023

Last Week

It was quite a gloomy end to the year, last week, as both bond and equity markets reflected on the worst year in most investors’ lifetimes.

The biggest news of the week flowed out of China as the “Zero Covid” policy turned into “Covid 24-7." At first, stocks rallied as the markets contemplated a Chinese economic rebound in 2023 as the draconian zero policy is lifted. Then, seemingly a few moments later, contemplated the surge in cases and deaths in China and the potential for virus mutations to spread across the globe. If 2020 taught us anything it was that a virus does not need a passport or visa to cross borders.

Meanwhile, treasury yields spiked across the curve. The theme seemed to be a realization that the Fed’s job to get inflation down to its target of 2% will require rates higher for longer. Additionally, the question of “Who is going to buy all these bonds?” resonates as the Fed will be engaged in quantitative tightening for the entire new year. I believe that is a question that will move front and center in 2023. It’s not just about inflation.

• The S&P 500, while volatile, was roughly flat for the week. The average daily move was 0.90%.
• The NASDAQ declined 0.90% for the week. The average daily move for the week was 1.36%.
• The 2-year Treasury yield rose 11 basis points, closing at 4.43% on Friday with a high year-over-year of 4.72% and a low yield of 0.40%.
• The 10-year Treasury yield increased 13 basis points for the week, closing at 3.88% on Friday. The year-over-year high yield is 4.24% and the low yield is 1.345%.
• The VIX Index rose 3.8% for the week, closing at 21.67 Friday. The year-over-year high is 36.45 and the low is 16.29.
• The MOVE Index increased 7.4%for the week, closing at 121.61 on Friday. The year-over-year high is 160.72 and the low is 72.57.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 1 basis point for the week closing at 82 basis points on Friday. The high spread year-over-year high is 111 and the low is 49.
• High Yield corporate debt (as measured by Markit CDX) increased by 8 basis points, closing at 484 basis points on Friday with a year-over-year high of 627 and low of 288.
• US Dollar Index ended the week down 0.76%, closing at 103.522 on Friday. The year-over-year high is 114.11 and the low is 94.79.
• WTI Crude fell 0.88% (using the February 2023 WTI Futures contract) closing at 80.26 on Friday. The year-over-year high is 123.70 and the low is 71.02.
• Gold (as measured by the February futures contract) rose 1.2% for the week closing at 1,826 on Friday. The high price for the front contract year-over-year is 2,043 and the low is 1,645.
• Bitcoin dropped 1.38% closing at 16,579 on Friday with a high price year-over-year of 67,734 and a low of 15,632.

The Week Ahead

We come in this morning with global bond yields down sharply, reversing some of last week’s selloff. There’s been a good amount of commentary recently devoted to the comeback of the 60/40 strategy (60% stocks/40% bonds) so perhaps investors are hitting the ground running on the first trading day of the New Year. German CPI came in lower than expected this morning printing 9.6% versus the expected 10.1%. Global equities are also up a good amount.

There are quite a lot of cross-currents to navigate as we start the year. We will be entering the second year of the war in Ukraine, the European winter energy crisis (or lack thereof), Covid in China and beyond, and trade relations with China as the U.S. coalition looks to cut China out of the chip market leading the fight, as well as a whole host of other issues. What’s important to remember is, these are just the issues we know about. Recent history teaches us there’s probably plenty yet to reveal itself.

We have an action-packed data week, with ISM and JOLTS reports on Wednesday as well as the December 2022 FOMC meeting minutes. All eyes will be on Friday’s December 2022 non-farm payroll report, the last one the Fed will see in front of the next FOMC meeting which concludes on February 1. Good luck in 2023!

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield.• The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.• The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September.• The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September.• The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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