On the heels of a volatile year, investors are wondering where to go from here. While it’s true that the stock and bond markets have rebounded, this year remains in a state of flux. And, while the Federal Reserve has two mandates, the labor market in the United States is the key for a soft landing. Recent labor market strength has surprised to the upside, revealing a resilient, though gradually softening jobs market. Labor market demand will need to continue normalizing relative to supply to slow wage growth and bring down core inflation.  

The stock market rally has been truly impressive. Following a year of high inflation and multiple Fed rate hikes, the US GDP projection by the IMF has been raised from 1% to 1.4%,1 the S&P 500 is on a continued uptrend, the broad Index is up 8.12% this year through April 17 according to The Wall Street Journal, and retail sales jumped 3% in January, the biggest gain in two years, and well above the Bloomberg estimates of 1.9%.2  

Particularly driving the retail sales surge was a big bump in auto sales, as the supply chain issues that slowed auto manufacturing have finally smoothed out and a glut of new cars have moved onto the lots.3 And despite continued high food costs and restaurant prices, consumers have streamed back into restaurants, as dining sales jumped 7.2% in January, a 25% gain over the same time last year.4 JPMorgan economists raised their Q1 GDP projection from 1% to 2% on the news of the retail sales surge.5   

On the other hand, the Consumer Price Index report released on April 12 showed a 0.3% increase in March, which contributed to a 5% gain over the last year, slightly lower than expected.6 Much of this gain continues to be a function of high food, energy, and especially housing costs. The Producer Price Index, measuring the prices of raw goods on the open market, announced a 0.7% rise in prices for the month of January, the biggest increase since last summer.7 Economists surveyed by Dow Jones had predicted only a 0.4% rise.8 Oil prices remain on the high end but continue their trend of dropping as US stockpiles grow and the US dollar rises compared to other currencies.9 Following the report’s release, the Dow Jones Industrial Average dropped 200 points.  

Mortgage rates and rental prices remain stubbornly high as demand for housing far exceeds availability, for now. Rental prices are up 8.6% over a year ago.10 Apartment construction is now at a 40-year high, but it will take time for construction to catch up with housing needs and slow the rent growth. Already home construction has slowed in January to an annualized rate of 1.31 million homes, down from the previously estimated 1.36 million.11 The optimistic outlook for mortgages at present is that it could drop from 6.5% down to 5.5% by the end of the year, according to Lawrence Yun, chief economist for the National Realtors Association.12  

The good news is that inflation has been falling for 6 months straight. The market forecast is that it will drop to 4% by the end of 2023 and below 3% in 2024.13 This will take pressure off the Fed. In the meantime, don’t expect this movement to be a steady, straight line across the board. Oil prices and new car pricing, for example, are on the rise, while airline tickets and used car prices are dropping.14  

Meanwhile, the labor market is very strong. The unemployment rate has dropped to 3.4%, the lowest in two decades, and January’s US jobs report showed 517,000 new jobs as opposed to the expectation of only 185,000.15 Jobless claims remain low in the meantime.   

This glut of new jobs and rise in wages have still failed to entirely keep up with inflation, leading to a 1.8% loss in real pay over the last year.16 There remains some market trepidation that these new jobs (along with the Federal Reserve’s rate hikes) will factor into inflation and keep prices high.  

Treasury rates have gone up, as the yield on the 2-year note is up 6 basis points (bps) to 4.67%, the 10-year note yield rises 3 bps to 3.84%, and the 30-year bond rate nears 4bps to 3.89%. We’ll continue to keep an eye on the volatile Treasury yields, as inflation and a tight job market will likely spur the Fed to raise interest rates further. The Fed has already indicated its expectation that it will likely soon carry out two more quarter-point rate hikes. Dallas Fed President Lorie Logan said that the Federal Reserve “must remain prepared to continue rate increases for a longer period than previously anticipated.”17 The estimated range of 5% to 5.25% would already be the highest level since 2008, but Deutsche Bank took it a step further and predicted an additional two hikes over the course of 2023, to a range of 5.5% to 5.75%.18 

Last year’s worries of a pending recession continue to ease. Economists at Goldman Sachs recently lowered their odds of a recession in 2023 from 35% down to 25%.19 

And we will wait and see whether Congress is able to strike a deal to raise the debt ceiling by June, when the Treasury Department’s ability to pay its bills would be exhausted. 

The upshot, though, is that the market’s fears of recession are subsiding but not gone. Expect the unexpected in 2023 and beyond. It’s best to plan and be disciplined about your asset allocation strategies, and when you need to be defensive, cash can be your friend. 

Mark Martiak is a New York-based Investment Adviser Representative and Accredited Investment Fiduciary® for AGP / Alliance Global Partners, a registered investment adviser and broker-dealer, Member FINRA | SIPC. Mark is a regular Contributor to VEGAS LEGAL MAGAZINE and has appeared on CNBC’s CLOSING BELL, YAHOO! FINANCE MIDDAY MARKET MOVERS, FOX BUSINESS NETWORK and has been quoted in THE WALL STREET JOURNAL. Check out the Martiak Market Update Podcast wherever you listen to your podcasts. 

Research provided by Josh Silverman. Such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy. Indexes are unmanaged, and investors are not able to invest directly into any index. Past performance is no guarantee of future result. 

News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. 

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. The market indexes listed are unmanaged and are not available for direct investment.  

1 Seeking Alpha, “The State of the Market and Economy at Mid-Quarter,” Louis Navellier, 2/14/23

2 Associated Press, “Retail sales jump as Americans defy inflation and rate hikes,” Christopher Rugaber, 2/15/23

3 Associated Press, “Retail sales jump as Americans defy inflation and rate hikes,” Christopher Rugaber, 2/15/23

4 Associated Press, “Retail sales jump as Americans defy inflation and rate hikes,” Christopher Rugaber, 2/15/23

5 Yahoo Finance, “Stock market news today: Stocks fall, bond yields higher, and bitcoin rallies,” Dani Romero, 2/16/23

6 US Bureau of Labor Statistics The Consumer Price Index for All Urban Consumers (CPI-U) increased 5.0 percent over the last 12 months to an index level of 301.836 (1982-84=100). For the month, the index increased 0.3 percent prior to seasonal adjustment.

7 CNBC.com, “Wholesale prices rose 0.7% in January, more than expected, fueling inflation increase,” Jeff Cox, 2/16/23

8 CNBC.com, “Dow falls nearly 200 points after another hot inflation report,” Sarah Min, 2/16/23

9 Bloomberg News, “Oil Slips as US Supply Build Overshadows Stronger China Outlook,” Immanual John Milton and Natalia Kniazhevich, 2/15/23

10 USA Today, “CPI report revealed inflated cost of housing. What that means for rent, mortgages,” Swapna Venugopal Ramaswamy, 2/14/23

11 U.S. Census Bureau, “Monthly New Residential Construction, January 2023,” 2/16/23

12 USA Today, “CPI report revealed inflated cost of housing. What that means for rent, mortgages,” Swapna Venugopal Ramaswamy, 2/14/23

13 “Can the market rally continue? Weighing the pros and cons of the path ahead,” Mona Mahajan,Sr. Investment Strategist, Edward Jones 2/13/23

14 CNBC.com, “Inflation rose 0.5% in January, more than expected and up 6.4% from a year ago,” Jeff Cox, 2/14/23.

15 “Can the market rally continue? Weighing the pros and cons of the path ahead,” Mona Mahajan, Sr Investment Strategist, Edward Jones 2/13/23

16 U.S. Bureau of Labor Statistics, Real Earnings Summary, 2/14/23

17 Yahoo News, “Stock market news today: Stocks rise after strong retail sales data,” Alexandra Semenova, 2/15/23

18 Associated Press, “Retail sales jump as Americans defy inflation and rate hikes,” Christopher Rugaber, 2/15/23

19 Associated Press, “Retail sales jump as Americans defy inflation and rate hikes,” Christopher Rugaber, 2/15/23