The stock market continued its solid start to 2023 despite fear of rising interest and a recession. Inflation reports came in better than expected, and comments from members of the U.S. Federal Reserve were less hawkish. As a result, investors seemingly embraced more risk.

Image: Dividend Power

Ten of the eleven sectors posted gains for the week. As shown by data from Stock Rover*, all the major indices were positive, with the Russell 2000 performing the best. Small cap stocks continued to lead the way, followed by tech and growth stocks. Reversing last year’s trend, the Dow 30 was the worst-performing index. Oil rebounded, and the VIX plunged.

The Consumer Cyclical Sector led the way, followed by Technology and Real Estate. However, Utilities and Healthcare performed poorly on a relative basis, while Consumer Defensive was down.

Source: Stock Rover*

For the year, the Russell 2000 is doing the best followed by the Nasdaq. But all the major indices are up. In addition, all 11 sectors are up year-to-date.

The dividend growth investing strategy has performed relatively well, outperforming the S&P 500 Index and Nasdaq for the week. The table below shows their performance by category. All categories are now in positive territory.

Source: Stock Rover*

Stock Market Valuation This Week

The S&P 500 Index is trading at a price-to-earnings ratio of 20.8X, and the Schiller P/E Ratio is about 28.24X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent correction and a bear market and rebound. Earnings multiples of more than 30X are overvalued based on historical data.

Stock Market Volatility This Week – CBOE VIX

This past week, the CBOE VIX measuring volatility ended at 18.45. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.

Economic News This Week

The U.S. Energy Information Administration (EIA), in its January 2023 Short-Term Energy Outlook (STEO), expects total U.S. energy consumption to fall by 0.9% in 2023 and then rise by 1.0% in 2024. The EIA projects that power consumption will slip from the record 4,044 billion kilowatt-hours (kWh) in 2022 to 4,014 billion kWh in 2023. It is then to increase to 4,064 billion kWh in 2024.

Global consumption of liquid fuels is expected to increase to 102.2 million b/d in 2024 from an average of 99.4 million b/d in 2022, driven primarily by growth in India and China. Brent crude oil price will average $83 per barrel (b) in 2023, down 18% from 2022, and continue to fall to $78/b in 2024. EIA forecasts U.S. gasoline refining margins will drop by 29% in 2023 and then again by 14% in 2024.

Retail gasoline prices are forecast to average around $3.30/gal in 2023 and $3.10/gal in 2024. Refining margins for diesel are projected to fall by 20% in 2023 and 38% in 2024. Retail diesel prices are expected to average about $4.20/gal in 2023, down 16% from 2022. In 2024, the price is expected to continue to fall to an average near $3.70/gal.

U.S. natural gas production is forecast to rise to a record 100.34 billion cubic feet per day (bcfd) in 2023 and 102.29 bcfd in 2024. Gas consumption is projected to fall to 86.74 bcfd in 2023 and 85.79 bcfd in 2024 from a record 88.72 bcfd in 2022.

The U.S. Bureau of Labor Statistics reported the consumer price index declined 0.1% in December. Over the last 12 months, the all-items index is up 6.5% before seasonal adjustment compared to 7.1% in November. This was the smallest 12-month increase since October 2021 and the third time since February when the annual CPI increase was reported below 8%.

The CPI peaked at 9.1% in June. On a monthly basis, the all items index ticked up (+0.3%), following November’s (+0.2%) reading and a (+0.3%) in October. A steep decline in gas prices was the primary contributor to the monthly all-items decrease. A (-9.4%) drop in the gasoline index more than offset a (+0.8%) increase in the shelter index. The energy index was down (-4.5%) as fuel oil dropped (-16.6%).

The indexes for airfares (-3.1%), used vehicles (-2.5%), and new vehicles (-0.1%) all saw declines. The indexes for utility gas services (+3.0%), hospital services (+1.7%), electricity (+1.0%), motor vehicle insurance (+0.6%), and apparel (+0.5%) were among those that increased over the month. Core CPI inflation rose (+0.3%) in December, up from (+0.2%) the previous month.

The annual rate of core CPI inflation is now at 5.7%. The shelter index is up 7.5% year over year and accounts for nearly half of the total increase in Core CPI.

The Labor Department reported a decrease in initial jobless claims for the week ending January 7th. The seasonally adjusted initial claims reported at 205,000, a decrease of 1,000 from the previous week’s revised level. The last week’s level was revised up by 2,000 to 206,000. The four-week moving average, which smooths out volatility was 212,500, an increase of 1,750 from the previous week’s revised average. On an unadjusted basis, claims rose from 60,799 to 339,286. Of the 53 states and U.S. territories that report jobless claims, 19 reported declines, and 34 reported increases.

New Jersey (-4,351), Connecticut (-1,883), and Iowa (-1,682) saw the most decrease. California (+18,179) led with the most significant increase in initial claims, followed by New York (+17,507) and Texas (+9,425). For the week ending December 31st, the number of people continuing to claim unemployment, also known as the insured unemployment rate, was 1.3%, an increase of 0.1% from the prior week.

Continuing claims were reported at 1.874M, up 163,000 from the previous week’s level. For the week ending December 24th, 1.734M people were receiving jobless benefits through state or federal programs, an increase of 132,576 from the previous week’s level. There were 2.093M weekly claims filed for the comparable week in 2021.

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