2023 | Year End Review
The stock market soared in December, with the DJIA reaching an all-time high of 37,710 on December 28th, 2023. The S&P 500 Index closed at 4,783, its high for the year, notching its longest weekly rise since 2004. Investors shared the Federal Reserve’s optimism that inflation is easing. With the yield on the 10-year Treasury note falling to 3.91% on December 14th (below 4% for the first time since July), the impetus for investors to forego risk assets for the safety of bonds is subsiding.
The market’s exuberance this year was a welcome change from 2022’s heavy losses, with the DJIA posting a 14% gain for the year and the S&P 500 Index up 24%. The NASDAQ Index was up 44% with index leadership still centered on the Magnificent Seven stocks, which as a group rose 75% this year, with the remaining 493 up by a mere 12%. Tesla grew 130%; Apple is up 48%; Amazon rose 81%; Alphabet (Google) climbed 58%; NVidia soared 239%; Microsoft increased 57%, and Meta is up 194%.
Another market driver is earnings: Results for Q3 show a 4.5% rise during Q322. This is significant for two reasons. First, analysts had predicted a decline of 1.2%. Second, it is the first positive quarter after three negative ones and could imply positive momentum in 2024.
During the fourth quarter, the yield on the 10-year US Treasury note declined by 70 basis points, from 4.58% on September 28, to 3.88% on December 29, with the lower coupon income giving investors incentive to buy stocks. Consumers benefited from lower oil prices, which fell by nearly $17 a barrel during the quarter before closing the year at $71.28 per barrel.
Though some analysts forecast near-term rate cuts, it may be a fantasy, given bloated fiscal spending and rumblings of a slowing economy. Congress punted more Ukraine spending until it returned from the holiday recess, which may signal some slight restraint. GDP growth fell slightly in December from 5.2% to 4.9% in November but is still well above January 2023’s sluggish 2.9%.
We examine our primary themes: Federal Reserve Policy, the inflation forecast, and the possibility of a recession in 2024.
Fed policy – At the October FOMC meeting, the Committee left rates unchanged, as the 3.5% year/year core PCE (the Fed’s preferred inflation measure) is still well above its 2% inflation target. Nonetheless, if inflation continues to decline, some economists predict the Fed will begin trimming rates as early as May 2024, despite an economy that continues to expand.
Ongoing deficit spending is a harbinger of stubborn inflation, with most observers agreeing that current levels of debt financed deficit spending are unsustainable but the political class is reluctant to do anything about it. Soon, the interest we pay on our outstanding debt will crowd out spending on other needs such as defense and entitlement programs.
Recession outlook – Despite a slide in leading economic indicators for the twentieth consecutive month (which typically points to a recession), our near-term, no-recession outlook is buoyed by this quarter’s stock market boom.
The inverted yield curve, another indicator of recession, has been touted for more than a year, but investors seem to be shrugging off its implications. The Fed’s commitment to cut rates if needed, should the economy begin to slump, supports the declining odds of a tough recession.
Though recent numbers suggest employment may be softening (though still “solid”), the ADP Employment Change report for October and November showed 209,000 private jobs were added. Consumer sentiment soared to 69.7, its highest figure since July. Surveys by the University of Michigan point to hopes that the results of the 2024 election will be positive for the economy.
As we move into the throes of an election year, we are prepared for some positive aspects that could seep into the economy, painting an attractive picture for investors’ pockets the closer we get to November 5th.
We will be keeping an eye on the consumer, responsible for 67% of the economy. Strong holiday sales imply buyers are resilient, and the outlook for a recession has dropped, though inflation is still well above the Fed’s target. We expect the trend will remain.
Better-than-expected corporate earnings and a fairly solid employment landscape should help support the stock market. In addition, rising prices for small- and midcap stocks late in the year bode well for positive economic expectations.
As we start the new year, we will continue to maintain a healthy asset allocation with quality equities and fixed income and look for declining interest rates to help benefit both.
As always, feel free to contact us with questions.
Jonathan F. Kolle, CFA®
President, Chief Investment Officer
Daniel A. Morris, M.S.
Co-Chief Investment Officer
Joseph K. Champness
Director
Shawn R. Keane, CFP®
Vice-President
Cindy de Sainte Maresville, CFP®
Certified Financial Planner
Rusty Giles
Director of Marketing
James V. Kelly, CFA®
Director
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