January 2023 returns highlight calendar implications and that markets have no memories. Known as the January Effect owing to tax-loss harvesting, rebuying and other factors, stocks tend to rise in January. Furthermore, both bond and equity markets have positioned themselves for considerable Fed easing in 2H 2023 which may be appropriate. Risk assets through January 20th have rallied, with the S&P 500, the NASDAQ 100, the Bloomberg US Corporate High Yield Total Return Index and cryptocurrencies up 3.55%, 6.21%, 3.52% and 29.2% respectively. We expect high energy and commodity prices in 2023 as China reopens. As of January 20th ytd, copper futures are up 15%. While we don’t invest based on economic forecasts, we do note that no one including the Federal Reserve is factoring in the impact of higher commodity prices on inflation. In the meantime, with the 10-year US treasury at 3.482% and high yield spreads tight, fixed income is no longer as attractive as it was in Q-4 2022. Bonds may continue to rally, nonetheless. According to Nick Timiraos in the January 22, Wall Street Journal, the Fed is discussing a pause in interest rate hikes, soon after gaining confidence inflation will ease further this year.
It has been interesting to watch these dynamics play out in shipping equities. We correctly forecast that spot rates for tankers and dry bulk would fall into the Lunar New Year. However, we didn’t expect markets to look through lower spot rates in the short-term. Equity investors for now seem more focused on higher rates in 2H 2023. We began positioning in dry bulk spurred by the Chinese recovery in December. Our fundamental shipping theses are unchanged, with no clarity on propulsion technology and shipyard availability to spoil the party, as has happened in container shipping.
We expect to be surprised by events in 2023. Rapid decarbonization has always been sold as less expensive than conventional energy, while we see it as significantly more costly. We have wondered how Americans would respond when the higher prices became apparent. On January 17th, the Los Angeles suburb of Huntington Beach voted to exit their 100% renewable energy plan due to its high expense. We also debated if the insanely conservative Texas legislature would discourage migration from California. California is experiencing domestic citizen flight, with 300,000 citizens departing in 2022, and many coming to Texas. On the other hand, the San Francisco City Council seems ready to pay significant reparations for slavery to their qualifying Black residents. We are reminded of Margaret Thatcher’s quote, “The problem with socialism is that you run out of other people’s money.” Texas is likely safe for now.