Quarterly Market Review 2023 Q4

2023 Market Snapshot

While the year began with fears of a looming recession, 2023 defied expectations with one of the best years for stock market performance in the last decade. As we entered the year, the Federal Reserve continued to aggressively raise interest rates to fight high inflation, but the economy remained resilient, inflation eased, and both U.S. and global stocks and bonds ended with a positive Q4. A few interesting data points:

• After posting double-digit losses in 2022, stocks soared and bonds rebounded in 2023

• S&P 500 posted 26.4%  gains on a total returns basis, the biggest rally since 2019

• Since hitting bear-market lows in October 2022, stocks have rallied 36%

• Technology stocks posted a huge year, surging 59.1% for their best performance since 2009

• The Fed raised the Federal Funds rate by 0.25% in February, March, May, and July. Contrary to expectations, the Fed did not raise rates the remainder of the year. Current rates are 5.25%-5.5%.

• The yield curve remains inverted, meaning the 2-year Treasury yield is still higher than the 10-year Treasury yield

  
  

Below is a snapshot of key top-line economic indicators:

Here is a market summary of fourth quarter 2023 returns:

U.S. Stocks

Despite widespread speculation that 2023 would be a lackluster year for the U.S. stock market, Q4 delivered gains of 12.1% in it's best quarterly performance since late 2020. For the year in total, U.S. stocks, as measured by the S&P 500, rose 26.4% (including dividends).

The catalyst behind the significant deviation from expectations was the shift in Fed policy from interest rate increases to talk of potential rate decreases in late 2024. U.S. inflation continued to retreat from June 2022’s four-decade high of 9.1%, with the 12-month rise in inflation falling to 3.1% in November, a lower level than many had expected. For now, the Fed indicated they will likely continue to hold interest rates steady, despite inflation remaining above its 2% target.

Among the strongest performers in 2023 were technology stocks, recovering after a poor showing in 2022. The tech-heavy Nasdaq rose 44.6%. Much of the stock market’s gains can be attributed to just a handful of companies, recently dubbed the "Magnificent 7" (Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA)). 

International Stocks

Even as geopolitical tensions increased, with war continuing in Ukraine and hostilities erupting in the Middle East, global stock markets also bounced back after posting their worst year since the financial crisis. Despite continued global concerns, developed international stocks posted 17.9% gains, while emerging markets were up 9.8% for the year, despite the Chinese equity market being down 4.8%.

Fixed Income

Volatility remained unusually high in the bond market. 10-year U.S. Treasury yields, which are considered a benchmark for home mortgages and other loans, started the year near 3.8%, and stayed relatively steady from January through July. Then, in early August, the 10-year Treasury bond yield rose to a 17-year high near 5% in response to news of a government bond sell-off and a strong job market report. Just as quickly, as inflation numbers continued to slow and the Fed confirmed it expected to start cutting rates in 2024, the U.S. bond market recalibrated and rallied to post 6.8% returns in Q4.

The yield curve (measured as the difference between 2-year Treasury yields and 10-year Treasury yields) has been inverted for 17 months now (since July 2022). This resulted from the Fed's efforts to raise the Federal Funds rate, which brought short-term yields higher than long-term yields