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January Market Insights

A positive start to 2023 for markets as inflation subsides

By Neil Gilfedder, CFA®, Senior Vice President, Portfolio Management

Last updated: March 10, 2023 |

Article published: February 7, 2023

What happened

After a challenging 2022, markets in the U.S. and internationally made a strong start to the new year. At home, large-cap stocks closed the month up by 6.28%, the second-best January since 1990 for the S&P 500, and small caps were up by 9.49% (S&P 600 index). Abroad, developed-market stocks rose by 8.10% – the best January for the MSCI EAFE Index since 1994 – and emerging markets rose by 7.90% (MSCI Emerging Market index). Bonds also fared well, with the Bloomberg U.S. Aggregate Bond Index up by 3.08%, the best January since 1988 for the index. There were several days of big market moves: The S&P 500 moved by more than plus or minus 1% on nine days.

Why it happened

Markets tend to move when the unexpected happens, rather than on what is predicted. While 2022 was a year of negative surprises, from inflation to war, 2023 opened with fewer negative, and some positive, surprises. The most important of these were related to inflation. The most common measure of inflation, the annual change in the Consumer Price Index (an index of the variation in prices paid by typical consumers for retail goods and other items), fell for a sixth month in a row. At 6.5%, the latest CPI reading was a bit lower than expected and elicited a positive market reaction. At the same time, economic growth was stronger than expected, with Gross Domestic Product (a measure of economic growth) rising at an annual rate of 2.9%.

The jobs market remained tight. The unemployment rate fell to 3.4% and job creation was strong. But despite this, wage growth came in lower than expected – and this will tend to reduce inflationary pressure.

However, it was not all good news. Retail sales fell more than markets predicted, as did manufacturing output. We’re still in a time of economic and political uncertainty. Many questions remain: Will there be a recession, and if so, how severe? Will inflation continue to fall toward the Federal Reserve’s 2% target? How much will the Fed raise rates to bring inflation down? How will the debt-ceiling standoff be resolved? Will China’s economy rebound after the lifting of Covid restrictions? Nonetheless, after a lot of negative surprises in 2022, it was good to see some positive surprises to start the new year.

What it means for you

While January’s market performance brought welcome gains, it also was a good reminder that there are still a lot of unknowns. As we’ve said before, markets can move dramatically on surprises – both good and bad – which can result in higher volatility in the near term. Just as you have to mentally prepare for a market downturn, you have to view gains in the same objective way. A return to positive performance doesn’t mean you should start to take more risks with your portfolio, any more than you should move to cash when performance is negative.


Does January predict the rest of the year?

By Wei-Yin Hu, Ph.D., Vice President of Financial Research

We may all be relieved to see that stock markets rose in January, helping erase the bitter taste of last year’s negative returns in both bonds and stocks. There are some market pundits who view this as an indicator of positive stock returns for the rest of the year. Their belief is that if the stock market is up in January, then the rest of the year is likely to be up, and if stocks are down in January, the rest of the year is also likely to be down.

You shouldn’t be lured into investing according to this belief. While it’s true that there is a positive correlation between January returns and calendar year returns, there’s a simple reason for that: Stocks tend to go up over time. There are more positive months than negative months, and more positive years than negative years. This will automatically cause a correlation like the one observed.

There’s another good reason the rule shouldn’t be used to time the market. Remember that stock markets are forward-looking, and they react to new information that arrives on a daily basis. From any point forward, stocks may go up or down depending on the news. If you hold false confidence based on January being positive, then what you’re implicitly saying is that you don’t believe the remaining 11 months of the year can bring any significant bad news for the economy and stock markets. But common sense tells us that the earth continues to spin after January: The Fed will continue to make interest rate decisions, employment and corporate earnings will continue to evolve, and stock prices will react to those events.

That’s why we don’t think your investment strategy should change based on what happens in one magical month of the year. Investing is a long-term proposition. As you already know, past performance is no guarantee of future results, so you should be prepared to endure occasional downturns, armed with the confidence that for horizons of many years, stocks have provided positive returns that exceed inflation.


This material was prepared for informational and/or educational purposes only.  Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness.

An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.

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