Feb 16, 2023 Market Update: February 2023

It’s been an encouraging start to the year after a challenging 2022. Falling inflation, interest rates, and decent earnings have provided fuel for a nice market run to start the year. The S&P 500 is up over 8% this year and up over 15% since it bottomed in October 2022. Bonds (1) are up over 1% (through February 15th) this year and up over 5% since they bottomed in October (2).

However, the path of monetary policy and economic growth remains uncertain over the near term. Given the recent solid returns and an increasingly uncertain economic backdrop, we are reducing risk in portfolios. In equities, we favor U.S. mid cap, U.S. value and non-U.S. equities. In bonds, we favor short-term bonds.

From an economic perspective, our indicators are negative. Leading indicators like an inverted yield curve point toward a recession. In addition, there remain restrictive monetary and fiscal conditions that may negatively affect economic growth although there don’t appear to be significant imbalances that could create a steep recession like in 2008. Despite the negatives, 2023 has begun with some promising signs. China’s reemergence from COVID lockdowns has helped global economic activity and in the U.S., inflation has been coming down since June, which may allow interest rate hikes to pause. However, even if U.S. economic growth rebounds, it doesn’t necessarily mean asset prices will also rebound. Stronger economic growth could put upward pressure on inflation and prompt the Fed to keep interest rates higher for longer, weighing on both stock and bond prices.

Our market indicators remain bullish as the rally that began in October has been decisive and broad-based across various stocks, industries, and global markets. Most of our market indicators point to further upside for stocks for the remainder of 2023. For example, major stock indexes are above their major moving averages, bond yields are lower, and riskier areas of the market are outperforming defensive areas.

Investor sentiment has been extremely negative for nearly a year now, one of the longest periods in recent history. Yet, when the majority of investors are pessimistic, future stock returns have historically been strong. Some optimism has returned to markets in 2023, but not enough to warrant a shift in our reading.

Valuations are somewhat elevated in U.S. large-cap stocks but not at a historically overvalued extreme. Non-U.S. equity and small-cap U.S. equity markets appear undervalued. Corporate fundamentals have softened, with earnings growth declining -2.8% over the last year (3), but balance sheets remain healthy. Higher wages and interest expenses are pressuring profit margins, but many companies are quickly adjusting to support margins.

Please reach out to your advisor for any questions or concerns.




  1. Barclays Aggregate Index
  2. Koyfin. Returns through 2/15/23 Stocks bottomed 10/12/22 & bonds bottomed 10/20/22
  3. Factset

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Important Disclosures

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