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The year 2023 was marked by redemption. Most markets bounced back strongly after a rough 2022, recouping what was lost and placing us close to where we began two years ago. With the Federal Reserve’s pronouncement in December that 2024 was likely to see substantial rate cuts, stocks and bonds rose feverishly in the final two months to finish what turned out to be a good year across the board.
The economy has proven, yet again, to be resilient. As of December 2023, the unemployment rate was 3.7% (Source: Bureau of Labor Statistics). For all of 2023, employers added 2.7 million jobs, or an average monthly gain of 225,000 jobs. This was lower than the increase of 4.8 million in 2022 (with an average monthly gain of 399,000), but a larger gain than in the years preceding the pandemic (Source: JP Morgan).
GDP in the fourth quarter of 2023 was 3.3% (Source: Bureau of Economic Analysis), staving off a recession, albeit much lower than the prior quarter’s growth of 4.9% (Source: US Department of Commerce). Inflation pressures continue to ease but remain above the Fed’s 2% target as consumer prices for all items rose 3.4% from December 2022 to December 2023 (Source: Bureau of Labor Statistics). Wage growth (after inflation) turned positive for the first time since the pandemic (Source: Blue River), allowing workers some chance to repair the damage done to budgets from rising prices.
The potential moderation of interest rates in 2024 could also loosen the housing market via a larger inventory and untether those who wish to move but have otherwise stayed put.
There are plenty of positive economic indicators, and the coming year promises to be no less eventful than 2023. Odds are good there will be more noise for investors to sort through amidst the handful of challenges that may confound this favorable movement – including China struggling economically and no longer powering world growth, a contentious US presidential election, the spread of broader conflict in the Middle East, a growing debt crisis, and the consumer remaining under financial pressure, to name a few.
All things considered, Roehl & Yi would ideally like to see stock prices become less bound to interest rates and driven instead by more traditional profit growth – marking a true sign of a sustainably healthy market.
The S&P 500 Index ended 2023 with a big finish gaining 26.29%, a stark reversal from the 18.11% loss in 2022. The Russell 1000 large-cap growth index was up 42.68%, the Russell 1000 large-cap value index rose by 11.46%, and the Russell 2000 small-cap gained 16.93%, turning positive in the final two months of the year. Meanwhile, international stocks were up 18.24%* and the US bond market rose 5.53% for the year (Source: Morningstar).
The table below is an overview of market performance for 2023.
*The MSCI EAFE Index is an equity index that captures large- and mid-cap representation across 21 Developed Markets and countries around the world, excluding the US and Canada.
Market Rebound Spreads Globally
2023 was a momentous year for stock markets around the world, with the exceptions being Turkey, China, and Hong Kong. These rebounds are underscored by the US market being only in 7th place in terms of returns. When it came to market sectors we saw a near-perfect reversal from 2022 with technology leading the way with a 56% return (Source: Morningstar).
The chart above displays 2022 and 2023 returns for all 11 sectors of the S&P 500. The primary purpose is to show that most of the sectors with the strongest 2023 performance significantly lagged in 2022, and vice versa. The data in this chart is for informational purposes only. Past performance is no guarantee of future returns.
Interest Rates Remain Far From Historical Peaks
Understandably, investors have been whipsawed by the recent interest rate hikes, particularly given the speed at which they have occurred. Even with the Federal Funds rate increasing from 0% to over 5% from the start of 2022, US long-term rates today remain within normal ranges and far below the 14% interest rates experienced in 1980.
The Federal Reserve is in a delicate balance to achieve both lower inflation and economic growth, which could weigh on markets, though consumers are seeing a much higher return on bond yields.
On the upside, historically when 10-year rates were 4.0% to 6.0%, the median annualized return since 1976 for the S&P 500 Index was 14.20%, while the Bloomberg US Aggregate Index returned 6.99% (Source: Capital Group).
Mini-Recessions May Be a Saving Grace
Many analysts predicted a recession in 2023, which did not come to fruition in the traditional sense as demonstrated by a fall in GDP for two successive quarters.
A recession did occur, however, just not all at once. Over the past year and a half, we have been experiencing a phenomenon economists call a rolling recession – marked by different economic sector downturns at different times.
The charts below show various periods of decline across industries and markets. For example, residential housing contracted sharply in 2022 with existing home sales tumbling nearly 40% (Source: Capital Group). There are now signs of a housing market recovery. These types of contractions and recoveries (rolling recessions) could help prevent a traditional full-blown recession in 2024, despite the possibility for continuous stubborn inflation and higher interest rates.
Global Elections and the Unknown
The US is not the only country expecting an election this year. National elections are scheduled or expected in at least 64 countries as well as the European Union. Those 64 countries, along with the EU, represent almost half of the global population. These exercises in democracy always have the potential for unknown risks abroad as well as here at home (Source: Time Magazine).
Increasing Risks of War
In much the way the Russia-Ukraine war impacted oil, gas, and grain trade, other global conflicts have the potential to disrupt imports and exports, cause port delays, and affect our social order. Roehl & Yi will closely monitor these global events and strive to mitigate any material consequences to your portfolios.
ROELH & YI’s FINAL THOUGHTS
The economy is limber, but we believe that the full gravity of the rate hike cycle on the broader economy has likely yet to be observed. Continue to be mindful of converging domestic and world events that can cause market volatility and proceed with logic and reason.
Consider these three suggestions:
- As we move into a more stabilized rate environment, fixed income may present opportunities. NOTE: At the end of 2023, municipal bond yields were relatively higher and therefore we believe that they are more attractive than in prior years.
- Emphasize value and diversification to help protect against a resurgence in inflation.
- Ensure stock holdings are high quality.
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This client newsletter is provided for informational purposes only. Nothing herein should be construed as the provision of personalized investment advice, nor should it be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Third-party data sources contained herein are for illustrative purposes only and are believed to be reliable, but we take no responsibility as to their accuracy. The newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties, and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass. Investing involves risk of loss including loss of principal. Past investment performance is not a guarantee or predictor of future investment performance. Any reference to the performance of securities of markets, indexes or specific investments is for illustrative purposes only and does not represent any of R&Y’s recommendations or performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures for each index reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index.