The Quarter In Review | 4Q 2023
Stocks had a strong final quarter to the year, with the Russell 3000 Index returning 12.1 percent. All sectors except Energy posted positive returns. REITs were among the top performing sectors for the quarter, returning 17.1 percent, after the sector’s disappointing returns earlier in 2023.
In December, the Federal Reserve signaled progress in its fight against U.S. inflation, and fixed income markets posted strong fourth quarter returns as market participants wagered on rate cuts in 2024. Small cap stocks, particularly small value stocks, outperformed the market for the period, exceeding even the large cap growth segment that had a strong 2023.
NVIDIA was not the only company to benefit from the recent boom in artificial intelligence. Broadcom, the fifth largest contributor to the Russell 3000, had a strong fourth quarter as it returned 35 percent for the period. Tesla, which is in the “Magnificent Seven” set, posted negative returns for the quarter.
FIXED INCOME
In the bond market, U.S. Treasuries rebounded after posting their worst annual return in decades in 2022, with the Bloomberg U.S. Treasury Bond Index gaining 4.1 percent vs. the previous year’s 12.5 percent decline. But it was not a smooth ride for investors. Despite rising bond prices, yields (which fall when prices rise) were higher than they have been for most of the past decade. The 10-year Treasury yield nearly touched 5 percent in October for the first time since 2007, before pulling back below 4 percent by year-end. For the entire year, the 10-year yield was lower than that of three-month bills, keeping the yield curve inverted.
In terms of total returns, the U.S. Aggregate Bond index surged 6.8 percent for the quarter ending the year up 5.5 percent.
ALTERNATIVES
Even with positive returns in Wheat, Coffee and Gold, commodities declined in the fourth quarter with the Bloomberg Commodity Total Return Index down -4.6 percent. Natural Gas, Sugar and Crude Oil were the key story for the period, declining -25.6, -22.3, and -18.6 percent, respectively.
After a difficult first three quarters, U.S. Real Estate Investment Trusts (REITs) rallied hard erasing year-to-date declines, up +16.35 percent for the quarter and +13.96 percent for the year.
ECONOMY
The first reading of Q4 GDP showed that the U.S. economy grew at a 3.3 percent annualized pace, which is a decline from the 4.9 percent in Q3 but still much stronger than estimates of 2 percent.
As has been the case for several quarters, the prevailing characteristic remains a "tale of two economies". While the manufacturing sector (which makes up 8% of the U.S. economy) contracted for the 12th consecutive month, the services sector (constituting about 78% of GDP) expanded for the 11th consecutive month, serving as a primary driver behind continued wage inflation as well as tightness in the labor market.
While there's certainly a chance that the Fed will achieve its 2 percent inflation target without a commensurate spike in unemployment, there are still plenty of threats on the horizon. Notably, banks face pressure on several fronts, including declining values of longer-term debt holdings impacting balance sheets; savers shifting out of savings accounts as they seek higher-yielding money market funds; and record-level office vacancy rates that hinder the refinancing of low-rate real-estate loans into higher-rate loans.
Consumers, meanwhile, have just about burned their way through their post-COVID savings, which was the main driver for GDP growth in 2023. With credit card balances and delinquencies spiking and student loan payments resuming, it's unlikely that consumers will be able to sustain their spending levels and ride to the rescue once again in 2024. Businesses are also feeling the pinch from higher interest rates, as November saw a rapid increase in the number of Chapter 11 commercial bankruptcies.
Plenty of factors can still impact the economy and markets, including the conflicts in Israel and Ukraine, increased tensions with China, a spiking debt-to-GDP ratio, and chances for a government shutdown. Moreover, historically extreme valuations in a small handful of mega-cap stocks that account for about 30% of the market weight in the S&P 500 (i.e., the Magnificent Seven) means that any sort of correction in those names could reverberate through the broader market.
LOOKING FORWARD
It was a year that defied expectations by many accounts. A number of forecasts predicted that the U.S. economy would enter a recession in 2023 as the Federal Reserve raised interest rates to fight high inflation. But the economy remained resilient, inflation eased, and the Fed declined to lift rates later in the year. U.S. stocks rose in 2023, despite some setbacks along the way. Many economists who called for a recession have since walked back their predictions. This underscored that guessing where markets may be headed is not a reliable way to invest.
Economic resilience in the U.S. and elsewhere is helping boost the global outlook for 2024, but as investors learned last year, the only thing certain is that there will be plenty of uncertainties. Many variables are in play for markets this year, from wars in Ukraine and the Middle East to questions around interest rates. Investors are also likely to be closely following the upcoming presidential election in the U.S. But it’s worth noting that the political party that wins the White House is just one of many factors that investors consider when pricing assets, and stocks have generally trended upward regardless of which party holds the presidency. This may be reassuring when one considers the difficulty, or perhaps futility, of trying to guess what is going to happen in 2024—or any year.
That’s why we recommended planning for what might happen rather than trying to predict what will. Last year was a vivid example of this.
SUMMARY
Remember, we’re here to help. This also is where the time invested upfront with each of you shows its value. Formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves provides the solid footing needed for times like these with many changing facets.
We appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss.
Please follow this link to read the complete Quarterly Market Review (QMR) - 4Q 2023.