January 31, 2023 | 2 MIN READ

Weekly Market Update

Stocks Up, Earnings Down as Fed Meets

What happened last week?

  • Last week, the S&P 500 gained 2.5%
  • The Dow Jones index rose 1.8%
  • The Nasdaq composite advanced 4.3%
  • Market participants also expect the Fed to raise rates by 0.25% on Wednesday
  • After a run-up in recent stock and bond market returns, the Fed could make hawkish remarks to curb the market's enthusiasm and anchor inflation

3 Things to Know

A higher global GDP forecast

We have raised our global GDP forecasts for 2023 to +2.0% from +1.7%. Most of this is driven by China’s earlier-than-expected move to end its Covid-zero policy and clear indicators that Europe’s energy shock is abating. As regional natural gas prices retreat, the scope of the income drag on the entire region is abating.

While this won’t spark a European boom, it does mean bearish expectations were too bearish. This means the severity of a prospective global slowdown is lessening. But in the US, the coffee pot is boiling as we head toward a likely contraction a bit earlier than most expect. Recent data suggest the Fed’s heavy-handed monetary policy is impacting a broader set of economic factors more deeply month over month.

bulb icon What does this mean for investors?

The sharp rise in consumer goods and new home inventories this past year are leading, predictably, to reductions in construction, trade activity and industrial production. Once output in these sectors starts falling, it is likely that their declines will deepen.

Therefore, labor markets will likely slow sharply into the spring.

We believe the upcoming January employment report is likely to be the last to show large gains - a 200,000 gain is likely, primarily due to expected, seasonal distortions in the employment count.

While the jobs data will be released just after the Fed's February 1 press conference, we expect it to reinforce a hawkish message Chair Powell delivers.

This is because financial markets have been countering the Fed's tightening with rallies in bonds and equities this year. While the Fed is downshifting because of the weaker data, looking back at the inflation of the year past, Powell is likely to argue that the Fed's work is not done.

Recession-related slowdowns are at work

Residential housing contractions and slowing business investment will, ultimately, affect household spending. In fact, gravity is at work. Initially, much higher rates hit the most interest rate sensitive sectors like property.

The recent US GDP report indicated that residential fixed investment was down by 27%. While peak negativity in real estate may have been reached, the damage follows in employment and personal income.

We are likely seeing the very end of “Covid Cabin Fever” in the US, as well. While Americans were wealthier as government subsidies and “stay at home” savings grew, they are now being spent down.

To remain in spending mode, households will need to borrow more – surging credit card balances are evidence of this. But this is unsustainable. Gravity in markets works like this. Once producers overestimate the path for consumption and inventories rise, they cut back.

Corporate profits fall and labor markets weaken together. Once unemployment starts to rise, it tends to keep rising until monetary policy eases and producers have cut “too much.” This is the “gravity of the recession” where cost cutting leads to lower investment and more unemployment.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorraine Schmitt - North America Investment Strategy