LABJ Stock Index: February 27

A Whirlwind Start to 2023

It’s been quite a start to the new year. Economic data seems strong, equity markets have rallied even though bond yields are still high. Below are our thoughts on frequently asked questions.

Is the economy re-accelerating?

Our take is that the January data we have seen signals a solid growth backdrop for now, not a re-acceleration. While the retail sales and labor market data crushed expectations, we are wary of seasonal adjustment issues that flatter the picture. First, the Bureau of Labor Statistics has had some trouble around holiday periods, especially during the Covid-19 pandemic. The extreme strength in restaurants and department stores after notable weakness in November and December makes us take the data with a grain of salt. January’s warmer weather has been good for economic activity which can support establishments such as restaurants and auto dealers relative to “typical” January conditions. In all, the Economic Surprise Index is signaling that the economy is doing a touch better than most economists expected, but we hesitate to call it a re-acceleration.

Is the Federal Reserve Board making a mistake by easing up on markets? 

The key takeaway: Rates are still high enough to keep growth below trend. Some of the best arguments are that the housing market is still as unaffordable relative to median incomes as it has been since 1990, bank lending standards are tight, and nonmortgage consumer interest payments are rising. The path back down to 2% inflation is going to be bumpy, but we think the Fed’s path that is reflected in the rates will be enough to eventually work.

Will the recent equity rally hold?

Given lower near-term recession risks and improving fundamentals for many parts of the market relative to last year, we think the equity rally has been fair, and we feel good about the asset class over the next year and beyond. That said, risks remain. Inflation is still high, and the Fed still has its foot on the brake. The good news is that recent strength has been accompanied by lower volatility, meaning that investors can buy protection more cheaply to hedge positions over the next 6–12 months.

When is the municipal bond market going to loosen up a bit?

Hopefully soon! Investors came into the year with an insatiable appetite for municipal bonds, which has made municipals look expensive relative to Treasury bonds (especially on the front end). But there are some signs that we could loosen up a bit soon. Some large new issue deals came to the market in the last few weeks, and the supply picture looks like it should keep getting better as we get into spring. 

Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles