Dow Jones Industrial Average^®: 37,689.54 | 12.5%
S&P 500^® Index: 4,769.83 | 11.2%
NASDAQ Composite^® Index: 15,011.35| 13.6%
Russell 2000^® Index: 2,027.07 | 13.6%
10-year U.S. Treasury note yield: 3.87%

Best-performing S&P 500 sectors in Q4

Real Estate: 17.7%
Info. Technology: 16.9%
Financials: 13.4%

Weakest-performing S&P 500 sectors in Q4

Energy: -7.8%
Health Care: 5.9%
Consumer Staples: 4.8%

Past performance is no guarantee of future results. Indices are unmanaged, have no identifiable objectives and cannot be purchased. Performance of indices do not reflect the deduction of any fees and charges. 

Quarterly Market Headlines

• Equities surged during the fourth quarter as investors grew more confident that the Fed’s rate hikes would tame inflation without causing a recession. U.S. equity market returns were broad-based, as 10 of 11 S&P 500 sectors posted gains for the quarter. By contrast, the energy sector tumbled nearly 8%, as moderating global growth in 2024, particularly in China and the UK/Europe, could depress energy demand.
• As interest rates eased late in the quarter and recession fears subsided, real estate, technology, and financials led the way, posting double-digit returns. The tech-heavy NASDAQ Composite advanced 13.6% during the quarter. International indices posted modest gains, with London’s FTSE 100 Index up 1.6%, the European Stoxx 600 Index up 6.4%, and Japan’s Nikkei 225 Index gaining 5.0%.
• Treasury yields on longer-dated maturities (above one year) retreated substantially during the quarter, as the Fed’s dovish tone after the December FOMC meeting caught the market by surprise. Many market observers view the 2-year yield as relaying expectations for Fed policy in the coming 12-24 months, while the 10-year yield is indicative of longer-term consumer and business borrowing costs.

Federal Reserve

• Although the Fed left its federal funds policy range unchanged at 5.25%-5.50% at both the November and December meetings, Chair Powell’s remarks at the press conference after the December meeting caused a stir in the markets. Mr. Powell seemed to quash any expectations of further rates hikes, suggesting that significant progress had been made on tamping inflation, and that the full effects of previous rate hikes have yet to be realized in the economy.
• In their latest Summary of Economic Projections, Fed policymakers projected, on average, three potential rate cuts in 2024 (reducing rates by 75 basis points or 0.75 percentage points), though markets quickly went even further by pricing in expectations for cumulative rate cuts of 125-150 basis points this year.

Inflation, Labor, and Economic Conditions

• Inflation continued to moderate but remains above the Fed’s 2% annual target. The most recent consumer price index (CPI) pegged the annual rate at 3.4% (slightly above expectations, but down from over 6% at the start of 2023) while the personal consumption expenditures (PCE) price index registered 2.6%. The core measures of CPI and PCE, which strip out food and energy, clocked in at 3.9% and 3.2%, respectively. Longer-term inflation expectations—watched closely by the Fed—have remained in the 2-2.5% range, suggesting market participants remain confident in the Fed’s resolve to corral inflation.
• Following Hamas’s October 7^th attack on Israel, investors feared that the conflict could spread to other countries in the Middle East, thereby threatening oil supplies. However, after rising slightly to around $90/barrel in mid-October, the WTI benchmark oil price drifted back down to around $72/barrel at the end of 2023.
• Labor conditions, while still robust, have softened. Payroll employment rose by 216,000 in December and nearly 500,000 over the fourth quarter, down from 660,000 in the third quarter. In another sign of labor market resilience, the average number of job openings during the quarter (nearly 9 million) continued to substantially exceed the average number of unemployed persons (around 6.3 million). The unemployment rate remained below 4% throughout the year.
• Third-quarter real GDP leapt 4.9%, well above the 2.1% in the second quarter. Despite concerns about consumer debt and slowing wage growth, by most accounts holiday spending set an all-time high.
• GM, Ford, and Stellantis (the Big 3 U.S. automakers) agreed to new contract terms with the United Auto Workers (UAW) in October and early November, concluding an acrimonious strike which lasted nearly two months and impacted over 50,000 workers. It was estimated that the strike cost the overall U.S. economy $10 billion in output.  In a nod to the recently enhanced leverage of organized labor, the Big 3 agreed to noteworthy wage increases, restoration of cost-of-living increases, and commitments to future investments in U.S. facilities.
• Congress finished its 2023 legislative session without reaching consensus on a federal budget for fiscal year 2024 (which began October 1, 2023). To avoid a government shutdown, Congress hammered out another continuing resolution (CR) which funds four appropriations bills through January 19 and the remaining eight through February 2. Congress reconvened on January 8 and the budget will be a key legislative priority in the first month of the new session.

A quick recap of 2023

Despite numerous headwinds, including significant labor disruptions, an additional 100 basis points of policy tightening by the Federal Reserve, a narrowly averted shutdown of the federal government, and an outbreak of war in the Middle East, U.S. equity markets notched surprisingly impressive gains in 2023.   

Coming into the year, many market analysts were skeptical of companies’ ability to maintain profit margins in the face of ongoing increases in labor and materials costs, potentially slowing consumer spending, and a possible recession induced by expected further Fed policy tightening. Nonetheless, during 2023 many firms cut expenditures and raised prices to maintain solid profit margins and earnings.

It should be noted that about half of the S&P 500’s 24% rise in 2023 was attributable to a small group of high-growth stocks dubbed by market pundits as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). The aggregate return contribution of these stocks was nearly double their total weight in the S&P 500 index.

Over the past several years, increases in home prices and rent (i.e., shelter) costs created significant upward pressure on inflation figures. Some of the upward momentum in home prices was slowed by mortgage rates that remained in the 6-7% range throughout 2023, touching 7.8% in late October before falling back to around 6.6% at year end. 

Final thoughts for investors 

Most market analysts view a 2024 recession as quite unlikely. Consumer spending, employment, and housing have slowed, but remain well above levels that are typically associated with a recession. Fiscal stimulus via government spending is unlikely to pull back in a presidential election year, and the economy appears to have adapted to a higher interest rate environment more comfortably than many would have expected.

Nonetheless, challenges abound, including two wars (Russia-Ukraine and Israel-Hamas), Congressional budget negotiations, and the 2024 election campaigns for Congress and the presidency. Further, the market could be disappointed if the Fed keeps rates at current levels to ensure inflation has been vanquished or in response to an unexpected uptick in inflation.

As always, stay focused on long-term goals and speak with a financial professional.

_{This commentary is being provided for general informational purposes only. The information does not represent investment advice or a recommendation and/or solicitation of any financial transaction.}

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