The S&P 500 Index rose Friday for the first time in four days, with all 11 sectors gaining. While the broad benchmark remained down on the week, the biggest one-day gain in the tech-heavy Nasdaq 100 since November pushed it into positive territory for the period. The gains were due to increased risk sentiment and comments by Federal Reserve officials lowering fears of overly aggressive policy. Except for communication services, energy and technology, all sectors ended the week higher. Treasuries ended the week mostly firmer, with yields improving after the 10-year yield ended Wednesday at 3.37%, the lowest level since September. The dollar index ended the week weaker.
Shares in Europe ended lower after European Central Bank policymakers signaled that they would still hike interest rates, reigniting fears of a prolonged economic slowdown. Lagarde, ECB minutes reaffirm hawkish policy stance. In local currency terms, the pan-European STOXX Europe 600 Index ended the week modestly lower. Germany’s DAX Index fell 0.35%, France’s CAC 40 Index eased 0.39%, and Italy’s FTSE MIB Index was almost flat. The UK’s FTSE 100 Index declined 0.94%.
In US recently economic data has surprised to the downside. Existing home sales were down 1.5% month-over-month, Industrial production fell by 0.7% monthly in December, below estimates, the NY and Philadelphia Fed indexes indicated manufacturing trends contracted in January, and US ISM manufacturing data came weaker than expected. Even though one-month adverse data does not make a trend, several leading indicators are pointing to a slowdown of the US economy.
This week the United States will hit its debt ceiling of $31.4 trillion; while this is a concern, the United States government has successfully raised it 45 times in the past 40 years. It is important, as the debt ceiling sets the legal limit of all federal debt the government can accrue. The debt ceiling effectively caps the amount that the U.S. Treasury can borrow unless it’s raised or suspended by Congress. A higher debt ceiling allows the government to fund new deficits and issue debt for bills previously authorized.
The U.S. Treasury has $310 billion of cash on hand to fund itself until the debt ceiling is raised. It’s important to note that the United States has never failed to meet its financial obligations. According to analysts the most likely outcome is some sort of deal to raise the debt ceiling with a combination of spending cuts and tax increases that’s acceptable to both parties. All previous time an agreement was reached the last minute.
The fourth quarter earnings season for the S&P 500 is underway but not as strong as expected. The number and degree of positive earnings surprises reported by S&P 500 companies are below their 5-year and 10-year averages. Earnings declined year over year for the first time since Q3 2020. Till now 11% of the companies in the S&P 500 have reported results for Q4 2022, and earnings are 3.3% above estimates. Negative earnings surprises and downward revisions to earnings estimates for companies in the Financial sector have largely contributed to the downfall. In terms of revenues, 64% of S&P 500 companies have reported 0.3% revenues above estimates. Downward revisions to revenue estimates were in large in the Energy and Utilities sectors and have largely contributed to the decrease. During this coming week, 93 S&P 500 companies are scheduled to report results for the fourth quarter.
Equity and bond market volatility will remain elevated until the debt ceiling issue is resolved. There’s a consistent decrease in inflation during the last few months, and it is certain that “data-dependent” Fed will keep interest rates elevated for a longer period as it focuses on the cumulative effects of rate hikes. We remain defensive in our positioning, and we’d look for opportunities to upgrade our investment positions during market weakness. Within equities, we continue to favor U.S. Large Cap exposure, since China’s evolving COVID policies continue to weigh on manufacturing and growth. We’ve recently become more constructive on Developed European equities, as the energy crisis wasn’t as severe as anticipated. In the United States, large cap equities provide an attractive mix of quality, growth, and yield, even at high valuations and with deteriorating earnings. China’s reopening should provide tailwinds for several economies. For fixed income, we recommend an overweight to short- and longer-dated bonds. We remain defensive in our credit positioning, with at benchmark duration, and higher in credit quality. Some US high yield exposure can be considered. We caution that long-term investors should hold the course with their current asset allocation while remaining focused on their goals and ignore the short-term noise.
Money flowed into mutual funds and related investment products showing elevated demand across equities and fixed income, plus there was a surgeon funds in international markets. Net flows into global equity funds were positive in the week ending January 18, driven by strong flows into EM equity funds. Also flows into global fixed income funds were strong, including those into riskier sectors.