Market Performance Snapshot*
(Week ending January 6, 2023)

Dow Jones Industrial Average®: +1.5%

S&P 500® Index: +1.4%

NASDAQ Composite® Index: +1.0%

Russell 2000® Index: +1.8%

10-year U.S. Treasury note yield: 3.56%

  • 3.88% on December 30, 2022

Best-performing S&P 500 sector this week: Communication services, +3.7%

Weakest-performing S&P 500 sector this week: Health care, -0.2%

*Past performance is no guarantee of future results.

Stocks rise to start 2023

Equity indices rallied Friday to close the first week of 2023 in positive territory after a lower-than-expected reading on wage growth boosted confidence that inflation may be easing and future Fed action could be more tempered. The Friday rally overcame concerns earlier in the week about hawkish Fed commentary and persistent labor market strength. Bond yields also pulled back sharply after climbing more than 30 basis points in the final two weeks of 2022.

  • Labor market news dominated the economic calendar. On Friday, the Labor Department reported 223,000 jobs created in December, above the forecast for 200,000 and below November’s downwardly revised 256,000. The unemployment rate edged down to 3.5%, matching recent historical lows. The job gains brought total job creation in 2022 to 4.5 million, the second-best year on record after 2021’s 6.7 million.
  • The jobs report also revealed slowing wage growth, a potential sign inflation will continue to cool. Average hourly earnings were up 0.3% for the month, lower than in November, and 4.6% for the year, with both figures lower than expected.
  • ADP’s read on private-sector payrolls registered 235,000 jobs created in December, well above expectations, and average annual wage gains of 7.3%.
  • The Labor Department’s Job Openings and Labor Turnover Survey showed nearly 10.5 million job openings at the end of November, just slightly below October’s level and indicative of about 1.7 jobs for every unemployed worker.
  • New and continuing unemployment claims dipped during the holiday weeks, contributing to the overall picture of labor market tightness. However, announcements of large-scale job cuts by Amazon and Salesforce extended the recent trend of tech industry layoffs.
  • Purchasing managers surveys from S&P Global and the Institute for Supply Management showed the U.S. manufacturing and services sectors contracted in December, though price pressures eased in both sectors.

Fed-speak continues to unsettle markets

Minutes of the Federal Open Market Committee’s (FOMC’s) December meeting showed Fed officials were concerned that looser financial conditions, such as the lower borrowing rates and higher equity valuations experienced through much of the fourth quarter, could complicate the task of bringing inflation back down to the 2% target.

  • Given the risks of easing financial conditions, the FOMC said it will “be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee's resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”
  • Furthermore, “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023” and “several participants commented that historical experience cautioned against prematurely loosening monetary policy.”
  • The Committee did acknowledge that “the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path.”
  • Lastly, FOMC “participants noted that … the pace of increase for prices of core services excluding shelter—which represents the largest component of core PCE price inflation—was high” and “has tended to be closely linked to nominal wage growth and therefore would likely remain persistently elevated if the labor market remained very tight.”
  • The Fed minutes, combined with comments from regional Fed presidents Neel Kashkari and Esther George that they see the federal funds rate rising above 5% and remaining there for some time, created headwinds for equities. However St. Louis Fed president James Bullard—a noted policy hawk—injected some confidence into markets by saying the fed funds rate “is getting closer” to being sufficiently restrictive to rein in inflation and that 2023 may be “a disinflationary year.”
  • The consumer price index (CPI) for December is scheduled to be released on January 12.

A quick recap of 2022

Markets closed out a challenging 2022 that featured the sharpest Federal Reserve interest rate hikes in decades, the highest inflation in 40 years, continuing pandemic-related supply chain problems, and a major conflict in Ukraine that disrupted global commodity markets.

  • Major equity indices all declined in 2022, with the broad-based S&P 500 falling nearly 20%. The blue chip Dow Jones Industrial Average fared better, falling nearly 9%, while the tech-heavy NASDAQ Composite suffered the worst losses at just over 33%. Lofty valuations for previously high-flying tech and other growth stocks suffered from tighter monetary conditions including rapidly rising interest rates, as investors drastically cut their expectations of future earnings.
  • Equity markets in Hong Kong, Japan, and Europe declined around 10% for the year, though London’s FTSE Index eked out a nearly 1% gain.
  • Energy was by far the best-performing U.S. equities sector of 2022, climbing nearly 60% as rising crude prices and supply turbulence drove energy-company valuations higher. The utilities sector, the second-best performer, was down about 1% for the year. The consumer discretionary sector—hurt by high inflation and recession fears—and communication services—hampered by declining valuations for the likes of Alphabet, Meta, and Netflix—fell around 40% on the year.
  • Bond prices also suffered, with the broad U.S. investment-grade bond market falling about 13% in 2022 amid the sharp jump in yields (yields and prices move inversely).
  • The benchmark 10-year Treasury yield closed the year at 3.88%, 237 basis points above its 2021 close of 1.51%. The 2-year Treasury, which often moves in concert with expectations of Fed policy, closed the year at 4.42% versus its 2021 close of 0.73% The inversion between the two rates reached the widest level in decades, a potential indication of recession ahead, or a sign of market confidence that inflation will rapidly decelerate, or perhaps a mix of both.
  • The Fed’s tightening policy took its benchmark federal funds rate from a range of 0-0.25% to a range of 4.25-4.5%, the highest level since 2007. The Fed also began allowing its Treasury and mortgage-backed securities holdings to shrink, removing from the market some of the liquidity added during the pandemic.
  • In addition to sending Treasury yields higher, the Fed’s tightening actions pushed the U.S. dollar to its strongest level in 20 years. The stronger dollar dented corporate earnings for multinational firms (by reducing the dollar value of earnings in foreign currencies), while serving as one of the few brakes on rapidly rising prices through most of the year by making imports cheaper.
  • On the bright side for equities, the fourth quarter delivered gains for the S&P 500 and Dow Jones Industrial Average as inflation readings began to ease and market concerns about aggressive Fed tightening receded, at least temporarily. Major indices were down for the month of December.
  • Stepping back for broader perspective, the S&P 500 closed 2022 nearly 19% above its 2019 closing level, just prior to the pandemic touching off three years of economic and market turbulence.

Final thoughts for investors

New year, same concerns about inflation, economic growth, and Federal Reserve tightening. Market participants will continue parsing economic data—particularly around the labor market and inflation—to try to forecast the Fed’s upcoming interest rate moves and how they could affect economic growth. Corporate earnings reports in coming weeks will provide insight around the health of companies and consumers. As always, stay focused on long-term goals and speak with a financial professional.

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