Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
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The Quick Facts
- Stocks posted an impressive rally in 2023, with the S&P 500 up 26.3%
- Large-cap Growth outperformed Large-cap Value by a record 31.2%
- The tech-heavy Nasdaq 100 gained 55.1% in 2023, its best annual performance since 1999
- A huge two-month rally in bond prices rescued fixed income markets from an almost unthinkable third straight year of declines
- The Bloomberg U.S. Aggregate Index returned 3.8% in December after 4.5% in November as the yield on the 10-year Treasuries sank a massive 105 basis points in the last two months of 2023
- Financial conditions have eased dramatically since early November
- At its December meeting, the Federal Reserve (“Fed”) pivoted by signaling rate cuts in 2024
After a dismal 2022, the market had a surprisingly strong recovery in 2023 despite widespread expectations for a continuation of the 2022 bear market and a looming recession. Closing out the year with nine consecutive weeks of gains, the S&P 500 finished with a 4.5% return in December, 11.7% in 4Q 2023, and an impressive 26.3% return for calendar year 2023.
After last year’s 33.0% plunge, the tech-heavy Nasdaq 100 was up 5.6% in December and a historic 55.1% for calendar 2023. The 2023 fates of many indices were determined by their inclusion or omission of members of the Bloomberg “Magnificent 7” (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla), which together ended up contributing approximately 60% of the S&P 500’s calendar year performance.
A huge two-month rally in bond prices rescued fixed income markets from an almost unthinkable third straight year of declines. Thanks to optimism that the Fed would be able to engineer a soft landing, overall market sentiment improved drastically in the last two months of the year.
December Asset Class Performance
It is hard to overstate just how important the Yellen/Powell pivot of November was for financial conditions, resulting in 10-year treasury yields falling 105 basis points and stocks rallying 14.1% in the last two months of 2023. If the Fed pivot continues to push credit spreads tighter, mortgage rates lower, and equity markets higher, we believe there could be a solid rebound in the economy.
All sectors were up in December, ranging from 0.1% for Energy to 8.7% for Real Estate. Most sectors posted gains for the calendar year 2023, led by Information Technology, up an astounding 56.0%, followed by Communication Services, up 52.8%. The worst-performing sectors were Utilities, down 7.2%, followed by Consumer Staples and Energy, down 0.8% and 0.6%, respectively. Large-cap Growth underperformed Large-Cap Value stocks by 1.1% in December, but the Russell 1000 Growth index outperformed the Russell 1000 Value index by an impressive 31.2% in calendar 2023. However, over the last three years, the total return of the Large-cap Value and Large-cap Growth indices are now almost identical at 28.9% and 29.0%, respectively. The Russell 2000 Index – considered the world’s most closely followed gauge of smaller companies – was up 5.3% in December and 25.9% for calendar 2023. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 5.3% in December, 0.8% ahead of the S&P 500. Over the last three years, the ESG index is up 27.8% but is 5.2% behind the S&P 500 on a total return basis. Emerging markets equities also had a strong fourth quarter, up 7.9%, and finished up 9.8% for calendar 2023.
In the first week of November, the Treasury’s Quarterly Refunding Announcement (QRA) revealed noteworthy changes relating to the size and composition of future debt issuance, which contributed to a meaningful reversal in the tightening of financial conditions that had been taking place over the prior three months. That same week, a dovish Federal Open Market Committee (FOMC) meeting combined with a softer monthly employment led to a dramatic reversal in rates. The trend accelerated in mid-November with a softer CPI reading. At the Fed’s December 13 FOMC meeting, Chair Powell said policymakers had now turned their attention to rate cuts as inflation continued to decline towards their 2% goal. The bond market’s reaction was most profound at the longer end of the rates curve. The 10-year U.S. Treasury yield went full circle by starting the year at 3.87%, running to a high of 5.02% in October, before declining as much as 114 basis points and finishing at 3.88%.
Oil futures, as measured by the WTI Crude Oil $/bbl. declined 5.7% in December and 21.1% in 4Q 2023. For calendar 2023, oil futures traded down -10.7%, to close December at $72/bbl., a tailwind for the U.S. economy. Gold spot finished 2023 at $2,063 per troy ounce, gaining 1.3% in December and 13.1% for the year. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, lost another 2.1% in December and was down 4.6% in 4Q 2023 and 2.1% for calendar 2023. The U.S. Dollar posted its worst year since the onset of the pandemic as markets bet the Fed was set to lower interest rates after reining in prices. A weaker dollar is generally good news for both equity markets and commodities, just as a strong dollar tends to hold back stocks and other risky investments. Digital asset valuations were also in the green in December, with Bitcoin up 12.6% while Ethereum was up 11.5%. While Bitcoin generated a return three times greater than the market-leading Information Technology sector (157.0% vs. 56.0%), the two assets achieved similar risk-adjusted returns. Digital assets’ price surge in 2023 reflects a stronger appetite for risk assets and optimism regarding a spot Bitcoin ETF coming to market in the U.S. in 2024.
Interest rate volatility has been constant since the Fed began its rate-hiking cycle in 2022. While equity investors focus on the well-known CBOE Volatility Index (“VIX”), bond investors pay attention to the less famous ICE BofA MOVE (“MOVE”) Index, which measures bond market volatility. After a fourth spike above 140 in October, the MOVE Index trended lower in November and December. It remains elevated at year-end at 115 compared to historical averages, which reflects the uncertain rate environment. The VIX dropped to below 13 in November after a second half of 2023 high at 23, below the fear gauge’s long-term average of roughly 20. The VIX closed calendar year 2023 at 12.5, just shy of 12.0, its lowest level since before the pandemic.
Chart of the Month – Fed Funds Futures
Fed Funds Futures are financial derivatives that allow market participants to speculate on or hedge against future changes in the Federal Reserve’s target federal funds rate. The Federal Funds rate is the interest rate at which depository institutions (banks) lend funds held at the Federal Reserve to other depository institutions overnight. It is a key benchmark for short-term interest rates in the U.S.
Traders and analysts closely monitor Fed Funds Futures to gauge market expectations for future changes in interest rates. If the market expects the Fed to raise rates, Fed Funds Futures prices will reflect higher interest rates, and vice versa. It is important to note that while Fed Funds Futures provide an indication of market expectations, they are not perfectly predictive of future monetary policy actions, as various economic factors and conditions can influence the Fed’s decisions.
The Fed uses the federal funds rate as a tool to implement monetary policy. By influencing short-term interest rates, the Fed aims to achieve its dual mandate of maximum employment and stable prices. Changes in the federal funds rate have a broad impact on financial markets and the economy.
Interest rates have fallen dramatically in the past two months due to better inflation data and modestly weaker labor market and other economic activity data. The possibility of Fed rate cuts has also increased dramatically during this period. Six rate cuts are now priced in for 2024 as opposed to three in the Fed’s latest dot plot.
It would likely take faster-than-expected progress on returning inflation to the Fed’s 2% target, or a more severe economic downturn in 2024, to get that kind of easing of monetary policy.
Quote of the Month
“Earnings don’t move the overall market; it’s the Federal Reserve Board … focus on the central banks, and focus on the movement of liquidity … most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” – Stanley Druckenmiller
Major Asset Class Dashboard
Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
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