After contracting in the third quarter and throughout October, markets rallied in the final two months of 2023, leaving equities at or near all-time highs. In fact, all sectors posted positive returns, with the exception of Energy. Markets rebounded as worries surrounding inflation, the economy, and instability in Ukraine and the Middle East started to abate and as the Federal Reserve pivoted toward lowering rates now that inflation has fallen to the lowest in two years. The move by the Federal Reserve drove the yield curve lower over the mid-to-longer end of the curve as the yield on the 10-year U.S. Treasury note was at 3.9%, compared to 4.6% at the end of September 2023. For the quarter ending December 31, 2023, the S&P 500 Total Return Index was up 11.7%, compared to the Dow Jones Industrial Average and the Nasdaq Composite Index, which increased 13.1% and 13.6%, respectively. As a result, the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite finished full-year 2023 up 26.3%, 16.2% and 42.1%, respectively. From a fixed-income standpoint, the Bloomberg U.S. Intermediate Aggregate Bond Index increased 5.5% in the fourth quarter as yields dropped later in the quarter, which drove the Index up 5.2% for the full year.
Recent data points have started to show the Federal Reserve’s actions are taming inflation. Job and wage growth slowed in October and November, with wages growing by the least in 2.5 years. Unemployment in October rose to 3.9%, while contracting in November to 3.7%. Additionally, the year-over-year hourly average earnings increase was positive 4% in November, compared to close to a 6% increase at the beginning of 2022. As a result, recent comments by Fed members point to potentially lower rates in 2024 versus holding at current levels.
While growth in 2023 defied broader expectations for a recession, it remains unclear whether the economy will land softly or enter a recession. A soft landing would be ideal; however, we are mindful that a recession remains firmly on the table. Oil, which rebounded on supply disruptions in the Middle East, has since trended lower on demand concerns given weaker global economic growth. Oil closed the year down 10%, with Brent Crude finishing the year at $77.04 a barrel and U.S. West Texas Intermediate crude settling at $71.65 a barrel. These prices represent the lowest level since 2020. While the price of oil and the concomitant demand do not represent the proverbial canary in the coal mine, they do provide added pause. Furthermore, the price of gold remains close to all-time highs, trading over $2,000 per ounce, amid economic uncertainty and global geopolitical tensions. It is also worth highlighting that the shape of the yield curve is unchanged and remains inverted despite optimism. The curve has simply shifted lower over the mid-to-longer term. It is important not to forget that lower rates mean the economy will require stimulus to reinvigorate growth at some point in the future.
The overall shift in sentiment toward lower rates in the future pushed capital into equity and fixed-income securities meaningfully in the fourth quarter. While markets were at or near all-time highs as of the end of the year, returns were concentrated among a handful of names, notably seven companies: Microsoft, Apple, Nvidia, Amazon.com, Alphabet, Meta Platforms and Tesla. Together, these companies – coined the “Magnificent Seven” – were responsible for over 50% of the market gains for 2023. The outsized returns from these seven companies are not new as we have opined on concentration and valuations in previous commentaries, but it should not be forgotten how few stocks are driving broader indices.
Rising asset values inherently provide a level of comfort for investors. This situation can breed complacency, though, particularly when gauging recessionary risks. While we think that the chance of a recession in the long term is lower than before, we continue to believe that a recession is probable in the near term. At the very least, economic growth is poised to slow in 2024. As always, we cannot predict what the future holds, but we remain positioned to preserve capital, while being able to capitalize on broader growth prospects. Notwithstanding the current uncertain economic environment, we remain bullish on the U.S. economy in the longer term. We continue to believe that equities offer upside potential, that fixed income is more attractive, and that cash has also become a more attractive asset class compared to previous years.
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