January 2023 Investor Letter: Another Bear Market Bounce?
Market Summary
Promising economic data drives a rally in equities
Nasdaq posts best January since 2001
The yield curve remains inverted
US equities posted strong gains in January, driven by promising economic data. For the month, the Nasdaq gained 10.7%, its best January since 2001. The S&P 500 rose 6.3%, and the Dow added 2.9%.
Inflation cooled for the sixth successive month in December. CPI dropped to 6.5% from 7.1%, while GDP came in stronger than expected. These factors helped drive a rally in equities as investor sentiment improved, despite a slightly softer earnings season than Q4/21. The labor market remained stronger than expected, which continues to hamper the Fed’s efforts to tame inflation.
On February 1st, The Federal Reserve raised rates by 25 basis points, setting the benchmark target range to 4.5%-4.75%. Powell stressed that more hikes are to come to reach his long-term inflation target of 2%. Although his tone was more dovish than before, he stated that he would prefer to overtighten rates rather than not tighten them enough.
Although equities were strong, the bond market told a different story. The Treasury Curve remains deeply inverted, with the 10-year yield minus the 2-year yield sitting near its lowest level. Inverted yield curves have preceded every single recession in the past.
alphaAI Summary
During the month, all of our core strategies outperformed the S&P 500 on a risk-adjusted basis, although absolute gains were muted. Given the mixed economic data and the inverted yield curve, there is a high likelihood that January’s rally will turn out to be another bear market bounce rather than the beginning of a new bull market. For these reasons, our AI system was primarily focused on risk reduction and chose to not introduce excessive risk into our portfolios in order to participate in January’s rally. Looking forward, we continue to expect volatility in the markets as investors digest mixed economic data.
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