SUMMARY
We see January’s gains in equities as another bear market rally. We look for further economic weakness in early 2023 but are getting ready to position portfolios for the coming recovery.
- January's reported employment gain is inconsistent with many other recent data points reported for the US economy. In fact, the 517,000 gain reported is absurdly large enough to make many market participants skeptical. But that doesn't mean it will be ignored.
- We expect the big jobs number -- and other components of the employment report – to set back the recent rally in financial assets and strengthen the US dollar. And it likely will provide the Fed support for additional rate hikes, but is unlikely to give policymakers a sustainable rationale for a return to more rapid tightening.
- We believe the impact of last year's rapid monetary tightening hasn't been fully felt through the economy yet, with weaker hiring data on the horizon.
- We know markets lead the economy both up and down. That's why investors shouldn't wait for a weak economy to strengthen before shifting asset allocation to position for growth. What we're looking for are signs pointing to the finale to the weakening of the economy. Our data suggests sidelined investors won't have to wait long before the weakest readings for the economy are in sight around midyear.
- With the reset of global equity and bond valuations in 2022, long-term portfolio return prospects have improved sharply. All of this worry about cyclical conditions – the ups and downs of the stock market – can distract investors from focusing on the long-term potential of investing in economic development. That is why we will rotate toward riskier assets as signs of a lasting recovery become more convincing.
