February 2023 PDS Market Commentary

We were hoping for a strong start to the stock market this year and have yet to be disappointed! Through the first five weeks, the S&P has gained 8%, the Nasdaq is up 15%, and the Dow up 3%. Even the US Aggregate bond index is up near 1.5% this year. After a historically difficult year for diversified portfolios, it’s been a relief to see most asset classes working. In fact, 75% of the companies in the S&P 500 and the Nasdaq 100 are positive year to date.

But despite growth stocks outperforming, growth in the economy appear to be facing strong headwinds. The US leading economic indicators [LEI] are 10 data points that can help forecast the future health of the economy. At the close of 2022, the growth rate of these had moved to negative territory. The chart below goes back to 1970 and tracks the basket of leading economic indicators. The gray bars represent recessions. Since 1970, anytime these leading indicators have turned negative (the blue sections), a recession has eventually followed.

We are being cautiously optimistic the market trend that has begun the year will continue on, but there is no crystal ball to know what may crop up. Much of the performance has been a result of inflation continuing to tick down, paired with more confirmation from Jerome Powell and the Fed that interest rates are near their peak. “Disinflation has begun”, Powell said earlier this week. But with the probability of an economic recession growing, we expect volatility and risk to remain ever present in markets.

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