Markets started the new year with strong returns across nearly all equity and fixed income asset classes, a welcome reversal following the losses most investors experienced in 2022. January’s rally was largely driven by the hope that a Fed pivot or pause was on the horizon, as a number of key economic data points indicated that U.S. inflation was continuing to cool.
Within the U.S., the S&P 500 gained a respectable 6.29%, while non-U.S. developed and emerging markets both advanced by more than 7%, as dollar weakness continued to buoy returns. Investment grade bonds also posted strong results, gaining just over 3%, as rates declined meaningfully across the yield curve. Commodities were one of the few major asset classes to decline on the month, falling by -0.49%.
Equity
Equity markets re-embraced risk in January, reversing many of the trends that were at play in 2022. From a market cap standpoint, small caps shined on the month gaining 9.75%, while the S&P 500 advanced by 6.28%. This was generally the opposite case in the prior year, where small caps sold off by more than 20%, as large caps fell by just over 18%. The style dynamic also reversed, following a banner year for value stocks, which outperformed growth by more than 21%. Thus far in 2023, investors have seen growth stocks outperform their value counterparts by 3.15% (8.33% vs. 5.18%), as declining rates have benefitted long duration assets.
Non-U.S. equities continued last year’s rally, the start of which coincided with the peak in the U.S. dollar. The MSCI EAFE ended January higher by 8.10%, while the MSCI EM index gained 7.90% on the month. Over the prior four months, starting on October 1st 2022, the indexes have gained 26.84% and 18.36%, respectively. During the same period, MSCI EAFE returns benefitting from more than 1,000 bps of dollar weakness, while the emerging markets basket of currencies strengthened by nearly 500 bps.
Fixed Income
U.S. investment grade bonds gained 3.08% in January, coming off of a historically disappointing 13% loss in 2022. Returns were primarily driven by a reversal in the direction of interest rates. In January alone, investors saw treasury yields retreat by more than 30 bps at the 10 year point of the curve, while credit spreads declined in both investment grade and high yield credit markets. This propelled both the Bloomberg Corporate Bond index and High Yield index higher by 3.81% on the month. Emerging markets local currency bonds were a standout performer (+4.29%), benefitting from the same factors that drove U.S. bonds higher in addition to a weaker dollar.
Real Assets
Broad-basket commodities were one of the few major asset classes to decline in January, following a 16% gain in 2022. However, commodity declines were far from broad based during the month. The majority of the asset class’s losses were directly attributable to a massive 34% decline in natural gas prices, which fell on growing supplies and unseasonably warm weather. In a turnaround from last year, gold was a top performer on the month, gaining 6.02% as the safe haven asset became more attractive amidst declining treasury yields and a weakening dollar.
Closed End Funds
Closed end funds started the year off on strong footing, as all of the headwinds CEFs faced in 2022 turned into tailwinds in January. At a universe level, discounts narrowed by more than 350 bps, ending the month at just 3.68% below NAV. While discount narrowing was seen across all major asset classes, taxable bonds disproportionately benefitted, as declining yields and tightening credit spreads drove average discounts down by more than 450 bps during the month.
iCM Tactical Strategies
iCM’s tactical strategies, which utilize ETFs and/or mutual funds, boasted strong absolute performance during the month. Our overall fixed income strategy benefitted from its out-of-benchmark position in emerging markets local debt, while our slight underweight to duration detracted from relative results. Performance for our general equity strategy was supported by sizable overweights to non-U.S. developed markets, as well as a position in emerging markets value equities. However, in a reversal from 2022, our overweight to U.S. value stocks and an out-of-benchmark position in commodities, detracted from relative results.
Important Disclosures
Integrated Capital Management, Inc. is an SEC Registered Investment Advisor. Registration does not imply any certain level of skill or training. This blog is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
Any capital markets views are intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Outlook may change at any time given shifting market conditions. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index
Closed end funds are exchange traded, may trade at a discount to their net asset values and may deploy leverage. When the strategy purchases shares of a closed-end fund at a discount to its net asset value, there can be no assurance that the discount will decrease and may possibly increase. If a closed-end fund uses leverage, increases and decreases in the value of its share price may be magnified. Distributions by a closed-end fund may include a return of capital, which would reduce the fund’s net asset value and its earnings capacity. Closed end funds are offered by prospectus. The prospectus and/or other applicable offering documents contain this and other important information about the investment strategy. You should read the prospectus and/or other applicable offering documents carefully before investing. Investors should consider the investment objectives, risks, charges and expenses of the investment strategy before investing. iCM uses third-party data that is believed to be accurate and complete. All data is subject to change.
TICE Blended Benchmark comprised of 32% S&P 500/8% MSCI EAFE/38% Barclays Aggregate Bond/20% Barclays Municipal Bond/2% Cash
FTSE NAREIT All Equity REITs TR = U.S. REITs
S&P 500 Index = U.S. Large Cap
Russell 1000 Growth TR = U.S. Large Growth
Russell 1000 Value TR = U.S. Large Value
Russell 2000 Index = U.S. Small Cap
MSCI EAFE ND USD = Developed International Equities
BC High Yield Corp Bond = High Yield Bonds
BBgBarc Municipal TR = Municipal Bonds; BBgBarc
US Credit TR = U.S. IG Corp Bonds
BC Aggregate Bond = U.S. Taxable Bonds
Barclays Treasury TR = U.S. Treasury Bonds
MSCI Emerging Markets ND USD = Emerging Markets Equities;
JPM GBI EM Glbl Divers TR = EM Bonds;
Bloomberg Commodity TR USD = Broad Basket Commodities
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