Despite rampant speculation about a possible recession, the stock market managed to recover in spectacular fashion in 2023. In our latest Market Highlights, we recall some of the events that drove financial markets and look ahead to what 2024 may hold for investors.
INFLATION IS NO LONGER SKY HIGH
Inflation declined in 2023 after spiking the previous two years to levels not seen for forty years.1 So, while prices for goods and services are still increasing, they are going up at a slower speed. While inflation has come down from a high of 6.6% to 4.0% as of the last reading, we’re clearly not yet at the Federal Reserve’s preferred target of 2%. It remains to be seen how entrenched some components of inflation are, but considering that inflation is trending downward, the job market is still strong2, and we avoided a recession in 20233, the economy is looking brighter than it did a year ago.
12-month percentage change, Consumer Price Index, All items less food and energy
Note: Shaded area represents recession, as determined by the National Bureau of Economic Research.
Source: U.S. Bureau of Labor Statistics
STOCKS RECOVER with A.i. leading the way
Despite a bank failure, fears of a recession, and many unknowns related to the path of inflation and interest rates, the stock market was resilient in 2023 and returned 26.29%!4 This recovered the steep losses from the year before as shown in the graph below. The optimism surrounding generative artificial intelligence certainly created a boom for a select list of companies in the beginning of the year. But the stock market was only up single digits as of late October following a downgrading of the United States’ long-term credit rating.5 The final two months of the year saw the bulk of the stock market’s return as expectations for the softening of interest rates led to a more widespread recovery.6
bond behavior back to normal
Following an abysmal 2022 when bonds had one of their worst years ever (-13.01%), 2023 saw a return to normal with a 5.53% return.7 More importantly, the attractive interest rates of bonds can once again counterbalance the stock market when investors wish to flee to safety. This had been missing from the markets when interest rates were near zero. As we see from the table8 below, interest rates are still healthy but have fallen off their highs and may continue trending downward as inflation cools.
| Maturity | Yield | Highest Yield in 2023 |
|---|---|---|
| 6 Mo | 5.26% | 5.61% |
| 3 Yr | 4.01% | 5.03% |
| 5 Yr | 3.84% | 4.95% |
| 10 Yr | 3.88% | 4.98% |
| 20 Yr | 4.20% | 5.30% |
A Look Ahead…
The wildest predictions tend to make the headlines, so you can undoubtedly find articles predicting extreme bull and bear cases. Given that the last five years have returned 31.49%, 18.40%, 28.71%, -18.11%, and 26.29%4, respectively, will 2024 finally be a “normal” year with single-digit performance? The Federal Reserve lowering interest rates could support stock valuations, but we may have seen a fair amount of this already priced into the market in the fourth quarter of 2023.9 The uncertainty of an election year could create additional volatility, but this could just serve to balance the market from either extreme. We haven’t seen it for a while, but maybe we get a “normal” year of single digit growth after all. That’s a popular projection that doesn’t necessarily make the headlines.10 Either way, we’ll keep a balanced perspective with your long-term goals in focus.
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Sources & Disclosures
1. https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm
2. https://data.bls.gov/cgi-bin/surveymost
3. https://www.bea.gov/data/gdp/gross-domestic-product
4. Data from Kwanti.com based on the S&P 500 Total Return index
6. On 12/29/23, the expected value of the Fed Funds rate for the end of 2024 was 3.77%: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
7. Data from Kwanti.com based on the Barclays US Aggregate Bond index
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