First Quarter Factors Driving Markets

January 13, 2023

By Tim Courtney, Chief Investment Officer


There were a number of factors that investors could identify as potential movers of markets last year: inflation, the Ukraine war, lingering lockdowns in China and supply chain constraints.1 But in the end, there was only one that dominated the market’s attention and behavior from start to finish: interest rates. Last year, the Federal Reserve issued seven consecutive rate hikes as inflation reached a 40-year high in June. Below are three factors we’re continuing to watch as the year kicks off and the number one factor still is:


1. Fed Hiking and Inflation: In the fourth quarter, economic bad news was seen as good news since this would make rate increases less necessary. Markets reacted relatively well to falling Consumer Price Index (CPI) on the assumption that Fed activity would slow. Prices increased only 0.1% in November from the previous month and CPI has now fallen for five months.2 The market is priced assuming rates will peak and then begin to fall.

We expect inflation to continue to decline in 2023 and allow the Fed to slow rate increases. We also expect the Fed to stop interest rate hikes before they reach their target of 2% inflation, so that inflation still remains elevated.

2. Possibility of a Recession: The majority of economists are estimating a 2023 recession now known as the most anticipated recession in history. It’s not a certainty, especially if hiring remains strong and inflation fades (the most recent jobs number showed continued slowing wage inflation).3 Regardless, the U.S. Treasury yield curve and some equity prices are already priced as though a recession is in the making. However, we will be closely watching some key data points to determine the magnitude of a recession should it materialize.

If GDP activity contracts slightly, unemployment rises marginally and corporate earnings avoid a major decline, i.e. we have a soft landing, we will have a minor recession and it appears the market has already priced in this scenario. If higher interest rates meaningfully stunt economic activity and we experience a deep recession, this will cause more market volatility.

3. The U.S. Dollar and Overall Debt Levels: Raising interest rates helped wash away a lot of the distortion and speculation that emerged in the market in 2020 and 2021. Raising rates helped re-establish gravity in a market that became untethered.4 While this was healthy for long-term investors, we still haven’t fully grappled with the all-time high debt levels facing the U.S. on a federal, state, local, corporate and household scale. The interest we have to pay on debt will be higher as the Fed continues to raise rates.5 The dollar strengthened for much of 2022 but this could certainly begin to reverse.

We assume that government spending will continue to rise and that interest paid on debts will continue to rise (not going out on a limb here).  We’ll be looking at the dollar to determine if the market thinks this debt level can continue to be maintained.


If you have any questions about your portfolio as we navigate the start of 2023, please contact your Exencial Advisor.



  1. U.S. News & World Report (7/13/22) — Inflation Roared in June, Hitting 40-Year High of 9.1%, Well Above Forecasts
  2. CNBC (12/13/22) — Consumer prices rose less than expected in November, up 7.1% from a year ago
  3. The New York Times (1/6/23) — U.S. Added 223,000 Jobs in December, a Slight Easing in Pace
  4. The New York Times (12/19/22) — Trust the models? In this economy?
  5. CNBC Select (12/17/22) – The Fed increased interest rates again — here’s why you should save more and pay off debt in response

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