Well not quite. Stocks climbed 6.2% in January – second best January since 1990 – as a result of good inflation and Fed news, but then declined 2.6% in February, and for the year are up about 3.4%. Tech stocks on average are up for the year about 9% through February.
As you are probably tired of hearing by now, stocks will lag depending on the behavior and anticipated behavior of the Federal Reserve’s effort to fight inflation by cooling off the economy with rising interest rates. The Fed raised rates at the end of January, yes, but at only a quarter percentage point, was much less than the previous seven times. That was good. However, during February, data was released that showed continued pressure on inflation. The markets did not like this for fear that the Fed would raise longer and higher.
Tech up, Utilities down
Groups of stocks move differently in different years. For this reason, it is dangerous to make rash trading decisions by selling off something that may be going through a period in which it loses temporary favor with emotional markets. Utility and tech stocks demonstrate this.
Though early in 2023 yet, while tech stocks are up 9% in just two months, utility stocks are down 5%. Contrast this to 2022 in which tech stocks dropped a whopping 31% and utility stocks dropped only 2%. It always amuses me when reviewing new clients’ portfolios to see voluminous trading by their former broker, often selling high quality investments in an attempt to time the market – or just impress the client that they’re doing something.
Interest rates are still up – but be careful
One of the results of the Fed raising rates to raise inflation is that lending and savings rates have increased. As of today, the average 30-year mortgage rate is 7.1%. The average one-year bank CD rate in the country is 1.6%, but many banks are offering more, and a two-year treasury bond hit 4.8% today. It was 4.1% as recently as January 20th. Investment grade corporate bonds are now in the 6-7% range.
Yes, we are busy buying corporate and even some treasury bonds for clients, but we do it with eyes open. As tempting as a two-year treasury bond at 4.8% may be, what does the investor do at the end of two years if interest rates have fallen? Be stuck with new bonds that pay only 3%? Or, the idea of then taking these funds and investing in stocks may have missed much of a rising market during that time, especially if inflation slows. We saw the market rise 6.2% in January, one little month, on just hints of lower inflation. Many of our bond purchases have attempted to stagger maturity dates so as to prolong favorable high rates.
Happy St. Patty’s Day, a time when everybody can have a bit of the luck of the irish.
The Dougherty Investment Advisor Team