Stocks finished the year on a high note featuring the S&P 500 US large-cap index just below its all-time highs set in early 2022. Precipitating the recovery were falling interest rates after a Federal Reserve policy pivot that brought an unexpected end to its historically hawkish rate regime. The near two-year tightening campaign was intended to control inflation after the supply disruptions and stimulus excesses of the pandemic era. In fact, inflation has cooled to just over 3% annually, a mere third of peak levels. With the jobs market remaining robust, investors also celebrated the idea that the economy has sidestepped a widely anticipated recession and is ostensibly set for a “soft landing”. Other central banks are expected to follow the Fed’s lead. The major advance after the summer swoon is an important reminder to investors who were fearful of rising global conflicts that the stock market doesn’t always reflect headline news — a lesson to hold onto as we enter an election year.

For 2023, the S&P 500 index rose +26.2% (‘SPY’ Proxy ETF), nearly doubling in Q4 alone. Results overseas were up +18.4% for developed nations (‘EFA’), and +8.9% for emerging markets (‘EEM’). Notably, the level of divergence among indices extended far beyond global locals due to outsized gains among large-cap artificial intelligence stocks and a relatively poor showing among regional banks. The Russell 2000 US small-cap index closed 10-points below the S&P 500, finishing up +16.8% (‘IWM’). The takeaway here is that diversified portfolios held by many investors likely performed well beneath the headline grabbing large-caps. Nevertheless, it ended up to be a decent recovery year overall. Rounding out the major asset classes, the Bloomberg Aggregate Bond index finished higher by +5.7% (‘AGG’), while global real estate and commodities closed +10.9% (‘RWO’) and -6.2% (‘DBC’), respectively. The good news for income investors is that current yields once again exceed inflation. Finally, market volatility as expressed by the CBOE VIX index options fell to 12.45, well below the range historically associated with positive stocks returns, another affirmation for investors into 2024.

Despite the change in market tone, it would not be surprising to see the market take pause this winter into spring after the rapid year-end move. There was a palpable “fear of missing out” at play that may take time to level out. Further, while the Fed may have pivoted its rhetoric, inter-bank lending rates at 5.5% remain at their highest levels since 2007 and may still have a lagged effects on the economy, which is already showing some signs of slowing. Also, there is a serious disconnect between the number of rate cuts anticipated by the market versus those telegraphed by the Federal Reserve. At some point this will need to be reconciled. The market remains sensitive to swings in interest rates, and there is chance that rates have overshot to the downside. Thus, while our outlook on markets continues to be constructive for the year ahead, we will closely monitor price trends and the economy to tactically adjust portfolios. Meanwhile, here is to a happy and prosperous 2024.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice – please speak with your advisor about your particular situation.