Winter 2024 Market Commentary
Most investors would agree that 2023 was a wild ride that ended well. The S&P 500 gained 26% and the U.S. Aggregate Bond Index rose by 5.7%. The year started out with great trepidation as the Fed was raising interest rates rapidly to fight inflation. Markets had recovered from the October 2022 lows, but the economy seemed to be faltering after a record decline for combined stocks and bonds in 2022. Glimmers of hope in the first quarter of this year were dashed when a banking crisis led to the failure of Silicon Valley Bank and several other smaller banks. Once the Fed stepped in with new credit facilities for banks, the sector stabilized, and markets refocused on the new dawn of artificial intelligence (AI).
After a seesaw performance in January and February, stocks regained their footing in March and were powered higher by the tech sector through mid-year. The “Magnificent Seven” became the mantra as the top seven stocks in the S&P 500 index (Apple, Amazon, Alphabet, Meta, Microsoft, Tesla, and Nvidia) were responsible for most of the gains. The group was up 111% on an equally-weighted basis for the year. The AI frenzy became daily headline news as the top tech companies jockeyed for leadership – the race was on and the top stocks were powered higher by investors’ hopes for the future of technology. Their focus was prescient as 75% of the S&P 500 stocks underperformed the index for the year. In addition, small-cap, mid-cap, value, and international stocks also lagged the S&P 500 Index.
Interest rates continued to climb higher during the first half of 2023 as the Fed raised short-term rates to help slow economic growth and tame inflation. The Fed Funds rate rose to 5.25% by July and 10-year treasury rates rose relentlessly from 3.3% in March to nearly 5% by mid-October. Rising rates tempered stock returns and both stock and bond markets sold off – stocks dipped by nearly 10% from July highs to October lows and bond returns turned negative.
In a stunning reversal, 10-year treasury rates plunged in late October as a continuation of good inflation news and strong economic data led to investors’ expectations of the Fed easing interest rates in 2024. With the last Fed rate increase in July and Fed commentary of potential rate cuts next year, stocks rallied from October lows of only a 9% gain to end the year up 26% – nearly matching the 2022 highs. Bonds recovered sharply as well, from a -3% loss to a 5.6% gain.
Supporting markets during the year was the continuation of strong GDP growth, labor markets, and consumer spending, which offset mild weakness in manufacturing. Inflation also continued to moderate with November’s Consumer Price Index (CPI) reading at 3.1%, down from 6% at the start of the year, but still above the Federal Reserve target of 2%. While the current consensus favors a soft landing for the economy in 2024, we remain hopeful but somewhat skeptical given the historical record of leading economic indicators.
There are several key takeaways from 2023’s wild ride. 1. Wild rides are fairly normal. We would expect to see a 10% decline in about half of all calendar years, despite long-term overall growth. 2. The top seven stocks in the S&P 500 index are the most concentrated in history, suggesting increased risk if any of them were to fall. 3. Generational developments in technology (electricity, pharmaceuticals, internet, smart phones, broadband, AI…) can bring about dramatic change to markets, economies, and society, but the winners are hard to predict. 4. Trying to predict stock and bond returns continues to be impossible – staying invested based on your long-term financial goals remains the best strategy for long-term success.
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The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.