Clearview Portfolio Consulting Year End Market Recap

Key Points:

  • The US economy endured a challenging year and avoided a much-anticipated recession.
  • With inflation continuing to cool, the market expects that the Fed will be done raising rates for this cycle and expectations for rate cuts next year are emerging.
  • Stocks, bonds and cash had strong performances for 2023.

2023 was a surprising year for the economy and markets as a much-anticipated recession never materialized.  We started the year with inflation still at elevated levels (6%+) and the Fed continuing their interest rate hike campaign to cool demand and bring prices under control.  The rate increases that started in 2022 put pressure on financial institutions and a mini banking crisis ensued with the failure of a few niche banking institutions. While the Fed was late to raise rates this cycle, they may have threaded the needle as inflation declined during the year with US businesses and consumers still in relatively good shape. A soft-landing for the economy may still be in the cards if inflation continues to get to the 2% target and the economy continues to expand.  In the last months of the year, the market went from worrying how many more rate hikes were needed, to pricing in rate cuts next year.  This sent risk assets significantly higher.

The NASDAQ Composite soared +44.6% for the year, followed by the S&P500 +26.3% and the Dow Jones Industrial Average +16.2%.  Technology (+57.8%) led the market higher with big-cap names such as Apple, Microsoft and NVIDIA advancing on strong cash flows and artificial intelligence opportunities.  Communication services (+55.6%) and consumer discretionary (+42.1%) also moved meaningfully higher but were among the worst performers during the selloff in 2022.  Energy (-1.3%) was the only sector of the market to finish the year in negative territory as oil and natural gas prices fell.  Small caps, which tend to rely more on bank loans and floating rate debt for financing, underperformed larger companies with bigger balance sheets.  Value stocks underperformed growth; another reversal from 2022. Developed international equities performed well with the MSCI EAFE Index gaining 18.2% for the year.  Emerging markets continue to be dragged down by China, but Latin American stocks were a bright spot gaining 32.7%.  Diversifying supply chains away from China saw renewed interest in Mexican manufacturing, drawing investors to their markets.

After two consecutive years of negative returns, the Bloomberg US Aggregate Bond Index finished the year up 5.5%.  Relatively attractive current yields in high quality bonds and the prospects for lower rates in 2024 should provide good returns for bond investors in the quarters ahead.  Short sighted market pundits who claimed that 60/40 portfolios were dead, must be rethinking their positions as balanced investors saw double digit returns last year. Looking ahead, we still have a few uncertainties: slowing economic growth, global conflicts, elections etc.  However, consumers proved to be resilient in 2023 and lower rates could boost demand in the coming quarters from a healthy labor market with good wages and inexpensive energy costs. New highs in the stock market and potentially lower money market yields in 2024 may be a catalyst for some of the trillions of dollars sitting in cash to move into assets that make up balanced portfolios.

Sources: Morningstar Direct, Wall Street Journal, JPMorgan, Morgan Stanley