It’s hard to believe, but just like that, we’re on to 2023. And while the market action felt very similar to last year, with significant moves driven by multiple macroeconomic data releases, at least markets moved in the right direction. This week, employment reports were the primary driver of the markets, as ADP reported more robust job growth than anticipated. While this should seem like a positive development, the market viewed it as a negative, as a stronger jobs market may mean the Fed will keep rates higher for longer. In addition to the ADP report, the BLS Non-Farm Payroll report was released on Friday, showing higher-than-expected job growth. However, the market reacted positively to this report, as the increase in Average Hourly Earnings came in lower than expected at 0.3% month-over-month. The continued easing in hourly earnings growth could indicate that the labor market is cooling, which has been one of the main sticking points for the Fed in preventing them from taking a more dovish path. If both inflation and wage growth continue on their current courses, it is more likely than not that the Fed will have to take notice.
Moving in another direction, we’d like to spend some time discussing behavioral finance as we progress throughout 2023. Behavioral finance is an area of study that relates behavioral and cognitive psychology to financial planning to explain the presence and impact of people’s biases during the financial decision-making process. Understanding these natural biases and dealing with them appropriately can be particularly helpful, especially coming off a tough year where much of the news flow was negative. There will be much more to follow in the coming weeks and months.
Economy
- The U.S. equity markets ended higher for the week ending January 6, with continued price volatility throughout. There were plenty of economic data releases throughout the week, but the primary market movers were the ADP Employment report and the BLS Non-Farm Payroll report. Additional impactful reports included manufacturing and services PMI from S&P Global and the Institute for Supply Management (ISM), as well as the minutes from the FOMC meeting in December.
- BLS Non-Fram Payroll report stated that the U.S. economy added 223K jobs in December of 2022, the least since December of 2020, after a downwardly revised 256K rise in November, beating market expectations of 200K. The unemployment rate in the U.S. dropped to 3.5 percent in December 2022, falling below market expectations of 3.7 percent and matching the rates seen in September and July, which were the lowest since February 2020.
- Average hourly earnings for all employees on U.S. private nonfarm payrolls rose by 9 cents, or 0.3%, to $32.82 in December of 2022. This was the smallest growth in average hourly earnings in four months. In addition, this was below market forecasts of a 0.4% increase and a downwardly revised 0.4% gain in the prior month.
- ADP Employment change saw private businesses in the U.S. create 235K jobs in December of 2022, higher than an upwardly revised 182K in November and well above market forecasts of 150K. Nela Richardson, the ADP chief economist, said, “The labor market is strong but fragmented, with hiring varying sharply by industry and establishment size. Business segments that hired aggressively in the first half of 2022 have slowed hiring and, in some cases, cut jobs in the last month of the year.”
- The ISM Manufacturing PMI for the U.S. fell to 48.4 in December of 2022, slightly below forecasts of 48.5, pointing to the 2nd month of contraction in factory activity as Americans are shifting spending away from goods to services. Excluding the decline in April 2020 at the height of the covid pandemic, this was the lowest reading since February 2016.
- The ISM Services PMI for the U.S. fell to 49.6 in December of 2022, pointing to the first contraction in the services sector since May 2020 at the height of the covid pandemic, and well below market forecasts of 55. It compares with a reading of 56.5 in November. New orders contracted sharply (45.2 vs. 56 in November), and employment declined (49.8 vs. 51.5) due to economic uncertainty and an inability to backfill open positions.
Stocks
- U.S. equities were in positive territory. Communication Services and Materials were the top performers, while Healthcare and Energy lagged. Value stocks led growth stocks and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 31 basis points to 3.56% during the week.
- Global bond markets were in positive territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
