2023: A Year of Unexpected Turns

The start of a new year is a time to reflect on the past twelve months, especially for a year as eventful as 2023, in order to gain insights that might shape our strategies in 2024.

2023 was, by all means, full of surprises. We witnessed some cataclysmic events that could have spelled doom for the markets . Last year saw major upheavals, including the failure of three big banks, an unprecedented 11th interest rate hike by the Federal Reserve that increased rates to five-and-a-half percent, as well as a downgrade of U.S. debt by Fitch Ratings. Also, the United Auto Workers strike shook up the U.S. labor market, while the national political landscape was altered with the ousting of the House Speaker. International turbulence was pervasive as well. The Israeli invasion of Gaza that followed the Hamas incursion into Israel and the persistent Ukraine-Russia conflict have added to ongoing global unrest. Given this volatile backdrop, forecasters expected the stock market to falter, with many anticipating a continuation of the struggles from 2022.

Contrary to these predictions, 2023 ended on a relatively high note. Equity market performance was not only stable, but remarkably robust. The S&P 500’s 20%+ performance, in particular, was noteworthy. However, over 50% of its gains were driven by “The Magnificent Seven,” only 7 huge companies that skewed the index’s return. When we consider the S&P 500 on an equally-weighted basis — taking into account all 500 stocks — the picture changes. The index was only up about 13%, including dividends — a significant difference from the headline figures.

The bond market in 2023 also pulled out a positive year after an historic decline in 2022. The Wealth Alliance extended the duration of some of our bond investments early, a move that eventually paid off. From August to October, economic indicators supported a growing economy which was in direct contrast to the Federal Reserve’s mission. As such, the bond market pulled back. However, in October, investors saw a shift in various economic indicators, including retail sales and the Producer Price Index (PPI), supporting the continued economic slowdown which would allow the central bank to potentially reduce rates in 2024. This was what the market had been anxiously awaiting. This sentiment was solidified when Federal Reserve Chairman Jerome Powell hinted at a potential rate cut, marking a pivotal moment in the year. The result was a rejuvenated optimism in both the stock and bond markets.

Notably, inflation remained a point of focus throughout 2023. The latter half of the year saw a noticeable decline in inflation, influenced significantly by the housing and energy sectors. A key development was the U.S. increasing domestic energy output to a record, and emerging as the largest exporter of liquid natural gas in the world. This kept a lid on energy prices, helping the Fed in its battle with inflation. Additionally, we saw rents beginning to stabilize due to a two-year high in vacancy rates which should also help to mitigate inflationary trends..

As we move into 2024, we are cautiously optimistic. While geopolitical risks and domestic financial concerns remain, the foundations laid in the previous year provide a solid base for potential growth. We expect the bond market to continue its positive trajectory, especially if the Federal Reserve decides to cut interest rates.

Moreover, we see potential in the segments of the market that did not participate as actively in the 2023 rally. With the exception of those in the Magnificent Seven, many stocks underperformed, which could indicate an opportunity for investor catch-up in 2024. As always, we remain committed to monitoring market developments and adjusting our strategies accordingly to maximize the potential for our clients. If you have any questions about your portfolio, please contact your financial advisor at The Wealth Alliance.