Fed on Deck: Watch What They Say versus What They Do

Performance for Week Ending 1.27.2023:

The Dow Jones Industrial Average (Dow) finished up 1.81%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) added 2.66%, the Standard & Poor’s 500 Index (S&P 500) gained 2.47% and the Nasdaq Composite Index (NASDAQ) tacked on 4.32%. Sector breadth was positive with 9 of the 11 S&P sector groups closing higher. The Consumer Discretionary sector (+6.38%) was the best performer followed by Technology (+4.07%) and Communication Services (+3.28%). On the downside Health Care (-0.89%) led the way followed by the Utilities sector (-0.49%)

*See below for Index Definitions

MARKET OBSERVATIONS: 1/23/23  – 1/27/23

The S&P 500 finished the week higher, its third gain in the past four weeks. The Nasdaq Composite was the star performer last week as investors continued to move back into the mega-cap Technology space. Driving the gains has been further signs of easing inflationary pressure and growing bets the Federal Reserve is nearing the end of its rate hike campaign. On Friday, the Fed’s preferred inflation gauge—core personal consumption expenditures (PCE)—eased to its slowest annual pace in over a year, which in turn, should set the stage for policymakers to further scale back the pace of interest rate hikes at this week’s FOMC meeting. According to Bloomberg’s World Interest Rate Probability tool, it’s all but a done deal that the Fed will hike rates by 25 basis points at the conclusion of Wednesday’s gathering. Instead, the focus should be on the messaging around the potential for additional rate cuts at future meetings and their updated thoughts on inflation and economic growth.

Economic Roundup: The Commerce Department reported that the US economy grew 2.9% annualized in Q4 2022, ahead of the 2.6% forecast and only a modest cooldown from Q3's 3.2% advance. Consumer spending growth was fairly steady, as income gains and savings buffers mitigated pressure from high inflation. Consumer outlays rose by 2.1% following a slightly more buoyant 2.3% advance in Q3. Meanwhile, the Labor Department reported that initial claims for unemployment insurance fell 6k to186k in the week ended January 21, the lowest level since April last year. Elsewhere, the "flash" S&P U.S. manufacturing and services PMIs for January were reported earlier today. The manufacturing PMI climbed to 46.7 from 46.2, a 31-month low. The services PMI rose to 46.6 from 44.7. While both numbers increased month-to-month, readings below 50 still signal a contracting economy.

Fourth Quarter Earnings: Q4 earnings season remained front and center last week. As of Friday 143, members of the S&P 500 have reported results with nearly 70% surprising to the upside. Aggregate earnings growth for the group is down 1.1% from a year ago, but still above the 3.1% decline expected when all is said and done. So far, the strongest growth has come from the Industrials, Energy and Consumer Discretionary sectors, whereas, Telecom and Technology have delivered the weakest results. With 104 members of the S&P scheduled to release results during the coming week, we should have a pretty good feel for how corporate America closed out the year by this Friday.

The Week Ahead: The focal point in the week ahead will be the two-day (Tue & Wed) Federal Open Market Committee meeting. With a step down to a 25-basis point hike widely expected, the focus will be on what the Fed says versus what they do. Investors will be looking clarity on the path forward and thoughts on the economy and inflation. As the debate continues around when the Fed might bring their rate hikes to a pause, the monthly Payroll data on Friday will be watched very closely. According to Bloomberg, economists expect January nonfarm payrolls to expand by 188K and for the unemployment rate to edge of to 3.6% (from 3.5% in December). Other data reports of interest include; the ISM Manufacturing & Services reports, ADP employment data, weekly jobless claims, and consumer confidence during January. Turning to corporate earnings, just over 100 members of the S&P 500 are scheduled to release results. Big Tech will be a key highlight with Apple, Alphabet and Amazon all reporting on Thursday after the close.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.