A Wall Street Journal article at year-end 2023 provided a great description of the year in the markets. They summed it up well by saying, “Almost no one thought 2023 would be a blockbuster year for stocks. They could hardly have been more wrong.” And for most investors, the year marked a much-needed comeback after a disappointing 2022.
It was an interesting reversal because the media told us we should be worried about inflation and a potential looming recession. Instead, inflation cooled and the economy remained resilient. The Fed did raise interest rates four times in 2023 but signaled that additional increases are not expected.
So as we review our investment portfolios, we’re seeing mostly positive numbers. Here’s a quick recap on some benchmark indexes:
|S&P 500 Large Cap Index
|S&P Small Cap 600 Index
|S&P Developed BMI International Index
|S&P U.S. Aggregate Bond Index (total return)
|S&P Municipal Bond Index (total return)
|Dow Jones Equity All REIT Index
|Dow Jones Commodity Index (total return)
SOURCE: DOW JONES, DATA AS/OF 12-31-2023 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.
Looking back, here are some observations.
Despite all the warnings to the contrary, markets shook off a terrible October and finished 2023 with a flurry. This was the case for most stock indices in the United States and abroad, both large stocks and small ones. Global stocks did well too, but struggled to keep pace with their U.S. counterparts.
Growth and technology stocks outperformed as firms linked to artificial intelligence got support from investors backing the technology. Communications services stocks did well (think Google, Facebook, Netflix), as did financial stocks. Let us not forget that in Q1 we had a regional banking crisis and fears of a larger credit crunch. It appears the Fed acted in a way that calmed markets down.
Some of the underperformers were utility stocks, energy, and dividend-paying stocks in general. Gold had a good year, but the general basket of commodities cooled off due to pullbacks in oil, wheat, and corn prices.
We in the States mostly hear the most about the S&P 500. It came so close to its record high (from January 2022), and was mainly driven by mega tech stocks. You may have also heard about the “Magnificent 7”, which refers to this group of stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). In many respects, the index gains were lopsided, because approximately 1/3 of the 500 stocks in that index were negative for the year. Here’s a chart that depicts the significant difference in returns between the 7 and the other 493:
It was definitely an impressive year for the “Magnificent 7”. But to keep things in perspective, here’s how those same stocks did in 2022 versus 2023. This is data from Morningstar (January 2, 2024):
Zooming out to look at the past four years, we’ve seen quite the roller coaster for stocks. Not just the S&P500, but Nasdaq, International countries, and emerging markets have been reacting to a pandemic, inflationary aftershocks, wars, and historic interest rate movements. Here’s a visual along with the annualized rates of return of some major indices:
Investors spent much of 2023 bracing for a third straight year of bond losses (remember, bond prices move inversely to interest rates). But once the data showed inflation was slowing, bonds rallied (i.e. went up in price) in the fourth quarter. Bond investors breathed sighs of relief as bond returns in Q4 were enough to push the annual returns back to the positive side.
A case in point is the 10-year Treasury bond rate, a commonly viewed barometer of U.S. interest rates. Yields were volatile, exceeding 5% in October and declining significantly to finish the year at 3.87%. Bonds had their best two-month performance (November and December) in over 20 years. Here’s a visual of this:
So we’ve got low unemployment, moderating inflation, and stocks at/near record highs, yet people are still frowning. Where is the disconnect? If you haven’t already heard, a new word has been formulated – vibecession. Dictonary.com recognized vibecession as a new pop culture word in 2023. It’s meant to describe a general feeling or attitude, and in the case of our economy, a pessimism about the current state or future of it.
Despite the economy doing relatively well based on data, the public apparently feels pessimistic about the economic situation. While this terminology is new, the disconnect between people’s perceptions and objective indicators is well documented across time.
So while the catchy word vibecession highlights the divide of what’s occurring, I’d argue it seems to have little to no effect on consumer spending or the markets in general. At least not thus far. But it will be worth watching nonetheless.
Heading into 2024, debates are focused on whether the economy will continue to avoid a recession…or not. We’ll continue to see the prognosticators following the inflation data to see if it will stay on its moderating path. And the Fed is being watched closely for any clues to cutting interest rates – as many expect.
Just because we avoided the recession bullet in 2023 doesn’t necessarily mean we should let our guard down. We should still proceed investing with caution. For example, if inflation remains “sticky”, we might see some headwinds until the Fed believes it’s further under control. Similarly, we’re always in for surprises with the geopolitical tensions that we have going on.
One thing we do have in our favor (historically) is that this is a Presidential election year. According to First Trust, on average, the market was up 11.28% during 19 of the past 23 total elections, or 83% of the time, since the S&P 500 began producing positive results. We’ll find out in due time, but I do like having those statistics in our favor.
The Fed’s goal to slow the economy just enough to lower inflation back to its 2% mandate and avoid recession serves as the base outcome expected by the Fed and most market participants. Should this play out accordingly, 2024 could continue to produce solid returns in both equities and bonds.
However, the market currently appears priced to perfection. We’ll proceed with caution as monetary policy uncertainty, any reversal in yields, the presidential election, and, to a lesser extent, a looming U.S. Government shutdown could all lead to bouts of market angst and volatility. Or maybe they will serve as opportunities to average more money into stocks.
Our perspective remains unchanged: we remain cautiously optimistic and continue to focus on quality investments. This includes holding a globally diversified portfolio tailored to your specific needs. We see opportunities existing across most asset classes moving into 2024 and hope to capitalize on them.
Let’s hope we get another productive year ahead!
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.