The 4th quarter saw strong performance from nearly all asset classes, capping what turned out to be a great year for capital markets. The biggest driver of performance in Q4 was better-than-expected inflation numbers. In August, the Core PCE (the Fed’s preferred gauge of inflation) trailing 12 months was showing 3.9% inflation. Come November, it was down to 3.2%. This led the market to change expectations for more accommodative monetary policy. As of September 30th, the market was expecting 3 rate cuts in 2024. By December the market was pricing in 5 and a half.

Price Action:

The poor performance from September carried into October and by the 27th, markets were down another 4% as 10-year Treasury yields eclipsed 5% for the first time since 2007. Fortunately for investors, that was the turning point with stocks rallying 17% in the final two months of the year.  

Through September, seven U.S. companies (Apple, Microsoft, Google, Amazon, Facebook, Tesla, and Nvidia) had accounted for nearly all the growth in equity markets. Other commonly followed asset classes in aggregate were close to flat for the year. That changed in the 4th quarter with an “everything” rally turning 2024 into a good year for nearly all investors.

  • U.S. Small-Cap Value Stocks and REITs led equity asset classes in the 4th quarter, each gaining 16%.
  • For the year, Technology stocks were the top performer, gaining 59% in 2023. This was punctuated by Nvidia which gained 239% on the back of artificial intelligence news.
  • 2023 was almost exactly a reversal of 2022’s growth vs. value. Value stocks did 30% better in 2022 and 28% worse in 2023 leaving the two styles with nearly identical performance over the two-year period (essentially flat). 
  • The Federal Reserve left interest rates unchanged in the 4th quarter. In total, they hiked rates 4 times in 2023. 
  • Commodities were a mixed bag with Gold up 13% on the year and oil down 10%.
  • Housing prices rose steadily, up 0.9% for the last three months we have data.
  • Speculators in cryptocurrencies were handsomely rewarded in 2023, up 57% in the quarter and 156% for the year. Partially helping the asset class is the expectation that the SEC will approve a bitcoin ETF.

Looking Forward - The Federal Reserve and corporate earnings should be a large driver for markets. Fed officials have signaled 3 rate cuts next year, but the market is pricing in 5.5. If we only get 3 or 4 it will likely be a tough year for markets. The cumulative earnings growth of the S&P 500 is supposed to be 11% next year. This is high by historical standards (4.5%). If stocks can deliver on this that will be good for markets, if they come up short stocks will struggle to hold their value. The election is another wild card, the outcome is still very uncertain and its impact on markets is hard to anticipate. Stocks reacted favorably to each of the last two elections despite very different outcomes. It’s anyone’s guess how markets will react to this one.