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Gene Walden
Senior Finance Editor


Economy remains resilient despite Fed rate hikes

By Gene Walden, Senior Finance Editor | 02/07/2023

Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Model Portfolio Manager

It's the economy that just won’t die.

Even after a series of rate hikes by the Federal Reserve (Fed) totaling 4.25% over the past 12 months, along with other monetary tightening policies, the economy has continued to grow at a healthy clip.

Gross domestic product (GDP) grew by an annualized rate of 2.9% in the 4th quarter of 2022, according to the Bureau of Economic Analysis (BEA). That followed an unexpectedly strong 3rd quarter increase of 3.2%. GDP ended 2022 with a total increase of 2.1% after a slow start. Growth was driven by increases in private inventory investment, consumer spending, federal, state and local government spending, and nonresidential fixed investment, offset by declines in single-family home construction and exports.

Employment growth exploded in January, with employers adding more than half a million new workers. The unemployment rate dropped to just 3.4%, the lowest level in more than 50 years. And “help wanted” signs continue to proliferate, with job openings rising by half a million in December to a total of about 11 million openings, according to the Fed.

Personal consumption expenditures (PCE) declined 0.2% in December after a 0.1% drop in November, according to the January 27 BEA report. The PCE price index, which is an indicator of inflation, was up just 0.1% over the previous month, and up 5.0% from 12 months earlier. That was the lowest reading since October 2021. Excluding food and energy, prices were up just 4.4% for the 12-month period through December, a 14-month low.

The manufacturing sector continues to be adversely affected by the Fed hikes, with activity declining in January for the third straight month after 30 consecutive months of growth, according to the Institute for Supply Management (ISM) report issued February 1. Only two of the 15 industries tracked by ISM reported growth in manufacturing activity in January – Transportation Equipment and Miscellaneous Manufacturing. According to the report, manufacturers have indicated that they have reduced activity in the 1st quarter of 2023 due to a slowdown in orders but are preparing for a strong second half of 2023. The report noted a couple of positive trends – improved delivery times for parts and supplies, which had been a major bottleneck coming out of the pandemic, and contracting prices for supplies for the fourth consecutive month.

Outlook: Some areas of the economy are responding to the Fed’s monetary tightening policies, with a slowdown in manufacturing and the housing market, tapering increases in the CPE price index, and diminishing corporate earnings expectations. But with solid 4th quarter GDP growth and a red-hot job market, the Fed may decide to take a more aggressive approach than anticipated in terms of rate hikes and other monetary tightening measures.

Investors should be prepared for higher interest rates for an extended period. Even after the rate hikes end, there is no indication the Fed will be in any rush to reverse course and begin cutting rates unless there’s an unexpectedly sharp downturn in the economy.

Although bond prices have staged a significant rally recently, and the prospect of near-term capital gains has diminished, the fixed income market now offers improved long-term income opportunities relative to the historically low yields of the past decade. Money market fund yields, which have been paying in the range of 4%, may continue to rise along with further Fed rate hikes.

Corporate earnings may continue to weaken in the short term, due to the impact of inflation on rising wages, corporate cost structures, and higher input costs.

In the equity market, technology stocks have already started to rebound after significant losses in 2022. Value stocks seem positioned for a relative performance advantage. Small cap valuations look attractive and could be poised to outperform later in 2023, as cyclical headwinds turn to tailwinds. Quality growth stocks could benefit from falling rates and a potential scarcity of growth options in a slowing economy. We expect market performance to stabilize later in 2023 or beyond.

Drilling down

U.S. stocks rally

The S&P 500® Index was up 6.18% in January, from 3,839.50 at the end of 2022 to 4076.60 at the January close, as investors reacted to some positive economic trends. The total return of the S&P 500 (including dividends) was 6.28%. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The tech-heavy NASDAQ Index fared even better, as technology stocks began to rebound from a dismal 2022. The NASDAQ was up 10.68% for the month, from 10,466.48 at the close of 2022 to 11,584.55 at the end of January. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales drop

Retail sales were down 1.2% from the previous month in December, but up 5.2% from a year earlier, as the economy recovered from the pandemic, according to the Department of Commerce retail report issued January 18.

Building material sales were up 0.3% from the previous month in December and up 2.3% from a year earlier, while department store sales were down 6.6% for the month and down 0.6% from a year earlier. Auto sales were down 1.4% from the previous month but up 1.3% from a year earlier. Non-store retailers (primarily online) were down 1.1% from the previous month, but up 13.7% from a year earlier.

Sales at food services and drinking establishments dropped 1.1% in December but were up 13.7% from a year earlier, as consumers returned to restaurants and bars after the pandemic slowdown.

Job gains top estimates

The economy added 517,000 new jobs in January, according to the Employment Situation Report issued February 3 by the Department of Labor. It was the 25th consecutive month of job growth in the U.S. The surge in employment blew away economists’ expectations of about 185,000 new jobs for the month.

The unemployment rate dropped to just 3.4% in January, the lowest rate since 1968. The U.S. has not posted a rate lower than 3.4% since 1953, according to the BEA.

The growth in new jobs has continued unabated despite the Fed’s efforts to cool off the economy. Job growth was widespread across industries, led by leisure and hospitality, professional and business services, and healthcare.

Average earnings increased by 0.3% in January, with hourly earnings rising by $0.10 for the month to $33.03. Over the past 12 months, hourly wages have increased by 4.4%.

Consumer Discretionary and Comm Services lead rebound

The two worst sectors of 2022 were the two best performing sectors in January as investors looked for bargains in the market. The Consumer Discretionary sector of the S&P 500 was up 15.02% in January after dropping 37.08% in 2022, and Communications Services was up 14.51% for the month after dropping 39.89% in 2022. Information Technology, up 9.32%, and Real Estate, up 9.90%, also rebounded from substantial declines in 2022.  

The chart below shows the results of the 11 sectors for the past month:

Treasury yields slip

Even with expectations for additional Fed rate increases, the yield on 10-year U.S. Treasuries declined slightly in January, from 3.88% at the end of 2022 to 3.53% at the January close.

Oil prices dip

Oil prices were down slightly in January, as the global economic slowdown helped ease demand. The price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropped 1.73% in January, from $80.26 per barrel at the close of 2022 to $78.87 at the end of January.

But gasoline prices at the pump headed the other direction, spiking 9.87% in January. The average price per gallon rose from $3.20 per gallon at the end of 2022 to $3.52 at the January close.

International equities make strong gains

International equities posted strong growth in January for the second consecutive month. The MSCI EAFE Index was up 8.05% in January after a 17.00% rally in December. The index, which tracks developed-economy stocks in Europe, Asia, and Australia, rose from 1,943.93 at the end of 2022 to 2,100.44 at the January close.

For a look at promising income opportunities in the rising interest rate environment, see: Revisiting evolving bond market opportunities, by Steve Lowe, Chief Investment Strategist, and Kent White, Vice President, Head of Fixed Income Mutual Funds.

Media contact: Callie Briese, 612-844-7340;

All information and representations herein are as of 02/07/2023, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

Past performance is not necessarily indicative of future results.

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