Market snapshot: 2023 starts with a bang

After December failed to live up to its bullish reputation, hope is that January will be better. Things have started well, but will it last? Our head of markets assesses conditions.

The calendar year may have changed, but the themes remain the same as the US and UK markets reopen for 2023.

Recessionary concerns will again top the agenda, underpinned by high inflation and rising interest rates. This in turn could point to a troubled January as investors search for positive indications that the tightening policies of the central banks may begin to ease given weakening economic data. There is, however, little sign of this being an imminent move and it seems that interest rates may yet go somewhat higher and even stay at those elevated levels for the entire year.

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This shortened trading week will not be light of clues as investors pick up the reins once more. In the US, amid a general slew of construction and manufacturing data, the latest release of the Federal Reserve minutes will be released on Wednesday, followed by the non-farm payrolls report on Friday.

For the latter, where the current consensus of 200,000 jobs having been added in December compared to 263,000 the previous month, any signs of a weakening labour market as companies become more cautious in their hiring plans would be well received. By the same token, another strong print would suggest that monetary tightening has yet to filter through to the economy in any meaningful way.

Such concerns resulted in a dire performance from the major indices in 2022, with the Dow Jones Industrial Average losing 8.8%, the benchmark S&P500 19.5% and the technology-heavy Nasdaq index dropping by 33.1%.

Asian markets were mixed overnight as investors continued to assess the possibility of a rebound in a Chinese economy which has been plagued by the ongoing effects of Covid-19. The latest manufacturing data from the region showed another reading in contractionary territory, with the reversal of the zero tolerance policy apparently leading to a new wave of infections. This has resulted in a further dent to demand and has disrupted businesses, while the advent of the lunar New Year could lead to further diminishing activity, albeit temporarily.

The potential for a Chinese recovery will be core for sentiment in the region, while the ongoing fractious relationship between the US and China will also play a part in establishing the direction of travel as the year progresses.

In the UK, the FTSE 100 index opened the year on the front foot in early exchanges, driven by mark-ups across various sectors, such as oils and banks. In addition, the possibility of increased Asian travel also boosted the likes of International Consolidated Airlines Group SA (LSE:IAG) and Rolls-Royce Holdings (LSE:RR.), while the initial risk-on approach came at the slight expensive of the more defensive sectors. 

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This added to a relatively resilient performance in 2022 in global terms, with the index eking out a gain of 0.9% for the year. In terms of total return, the figure was further boosted by an average dividend yield of 3.7%, leading to a comparatively strong gain as the FTSE100 found some favour among international investors.

The more domestically focused FTSE250 enjoyed no such advantage, however, losing 19.7% for the year as the UK economy struggled for either growth or indeed stability.