Quarterly Commentary, Q4 2023

Looking back, 2023 started with many investors expecting a modest year in the markets. There was anxiety over high inflation, rising interest rates, and widespread “hard landing” recession forecasts. Later, we endured regional banking turmoil and witnessed the onset of war in the Middle East. However, throughout 2023, consumer inflation decelerated, and the economy was resilient.

It ended up being a strong finish for stocks and bonds, which both advanced in the fourth quarter. The S&P 500 was up 11.69%, the Russell 2000 (small cap index) delivered 14.03%, and the international equity index (EAFE) finished up 10.42%. Small value and real estate stocks led the charge up 15.26% and 16.30%, respectively, in the quarter. The valuation of the S&P 500 is at a 25% premium to its 20-year average, partially attributable to the Magnificent 7 (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) and their rich valuations. In comparison, the valuation of small cap stocks, value stocks, and international stocks are all priced equal to or less than their 20-year valuations.

Bonds also delivered a respectable quarter as interest rates were down across the yield curve, driving prices up. The yield on the 10-year Treasury declined 75 basis points to 3.84%, bringing mortgage rates and borrowing costs down as well. The 10-year Treasury peaked at 4.98% in late October, possibly the peak in interest rates this cycle. The Bloomberg US Agg, reflecting all investment grade bonds in the U.S., was up 6.82%.

According to consensus expectations, the Fed has finished increasing interest rates while Chairman Powell even suggested the possibility of decreasing rates if the economic data supported the decision. Furthermore, the Fed’s “dot plot,” which is a summary of all the Federal Reserve Board member’s future interest rate expectations, indicated the possibility of three interest rate decreases in 2024. The financial markets reacted positively to this news and delivered compelling results across the board for the quarter. The U.S. equity markets are approximately equal to their all-time peak, which was January 3, 2022.

From a geo-political perspective, let’s hope the conflicts in the Middle East and Europe do not escalate and instead get resolved in the near term.

On a more positive note, the Fed may pull off what some economists thought was impossible, decreasing inflation to their 2% target by slowing the economy without creating a recession: a “soft landing”. Time will tell.

As always, if you have any questions or would like to discuss your investments, please reach out. Your Resource Consulting Group advisor is here to help.

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