After an optimistic start to the year, investor sentiment deteriorated slightly in February as a series of economic data challenged the rosy picture that markets were trying to portray.
Investors hoping for a less volatile experience in 2023 were reminded in February that ‘hope is not an investment strategy’. Last month, I outlined several factors that I believed led to a strong equity market rally in January but were less likely to be supportive moving forward. A main point highlighted was that in January, expectations of rate cuts beginning this year were likely overly optimistic.
At its source, this succession of monthly ups and downs appears symptomatic of a market stuck in a “land of confusion.” This period we find ourselves in today is where any signs of a strong economy is not automatically good news given the inflationary concerns and where every data point is subject to over-interpretation. This is indeed the story of the start of the year, and it will probably remain so for a few more months.
· Remember, through February, markets are still positive YTD.
· From a technical standpoint, as it relates to the S&P 500, that 4000 number has been a very important barrier and although we closed February just below it after some weakness the market, it has been hesitant to variate much below this threshold.
· The Nasdaq and ‘growth’ names have been leading the charge thus far. Remember, these were the names that were hardest hit in 2022.
· Canada had a good run last year in terms of outperformance largely in part to the outsized weight it has in energy and raw materials. Thus far, names that are more closely tied with the U.S. have done better.
Despite a Ying and yang start to 2023, I remain optimistic for the full year for both equities and fixed income as have likely already seen the bottom in both. Investors should continue to expect choppiness over the near term as more data on earnings, inflation, economic growth, and the Fed’s ultimate response to those comes to light. In this environment, and as I have been repeating for many months now, I tend to prefer a dollar-cost averaging approach to investing with the flexibility to increase market exposure should we get any material downturns.
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