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2023 Market Review

By Brian Famigletti, Managing Director & Head of Marketing

Resilience and Growth

The U.S. economy experienced a dynamic and challenging year in 2023, marked by high inflation, changing policies from the Federal Reserve, and global uncertainties. Despite these challenges, the economy showed remarkable resilience and adaptability.

Predictions of a looming recession were disproven as the U.S. economy not only withstood these challenges but thrived. It achieved real growth of 4.9% in the third quarter, indicative of a robust economic recovery.

However, the year was not without its difficulties. Inflation, rising yields, bank failures, resilient labor, and strong consumer spending contributed to a complex economic landscape. Exploring the key themes that shaped each quarter of 2023 may shed light on what to expect from the U.S. economy in 2024.

Q1: Overcoming Hurdles

In the first quarter of 2023, the U.S. financial markets navigated significant challenges, including 6% inflation and the collapse of major regional banks like Silicon Valley Bank and First Republic. Despite these hurdles, the markets maintained cautious optimism, with both stock and bond markets achieving single-digit gains.

Notably, the S&P 500 grew by 7.5% for the second consecutive quarter, driven largely by large-cap growth and defensive stocks. The Nasdaq-100 recorded its best first quarter since 2012, thanks to a strong performance in the technology and healthcare sectors. High-profile companies such as NVIDIA and Meta Platforms saw substantial monthly increases. The labor market grew steadily, too, adding over 200,000 jobs each month.

However, these developments were overshadowed by the major regional bank failures, brought on by heavy investments in long-dated Treasury bonds. In its effort to curb inflation, the Federal Reserve’s rate raise campaign continued into 2023, reaching one year of consecutive hikes in March. The effect of elevated rates on long-term Treasuries exposed those banks to large unrealized losses. Fed policy also brought on a tough quarter for borrowers, all while persistent inflation still weighed on consumers. The quarter concluded with the banking sector at low valuations and the anticipation of an earnings decline for the S&P 500.

Q2: Market Evolution & Tech Triumph

In the second quarter of 2023, the U.S. stock market demonstrated remarkable resilience and growth, particularly in large-cap and growth stocks, which significantly outperformed smaller caps and value stocks. The Nasdaq-100 experienced an unprecedented 39.4% gain in the first half of the year, its best since its inception in 1985. It notably outperformed other major indices like the S&P 500, Russell 2000, and Dow Jones Industrials.

June was a pivotal month for market breadth, with a shift into cyclicals. Industrial and homebuilding industries reached new all-time highs. Economic indicators were strong, with reduced inflation and a robust labor market boosting consumer confidence. The market also saw a rebound in housing despite higher mortgage rates.

On the flip side, corporate earnings continued to decline. And, although the Federal Reserve skipped a rate hike in June, investors anticipated additional increases. Nevertheless, market trends pointed to a more optimistic economic outlook, and recessionary concerns cooled.

Q3: Navigating Persistent Challenges

In the third quarter of 2023, the U.S. financial markets continued to face challenges, including Fitch’s downgrade of U.S. long-term debt. This was coupled with the first monthly declines in the S&P 500 and Nasdaq-100 indices since February.

But, despite a generally bearish market sentiment, corporate profits showed resilience. They declined for the third consecutive quarter, but overall still performed better than expected. Treasury yields saw significant movement, peaking at 4.35% before settling at 4.11% by August’s end. Various factors, including policy changes and market reactions to interest rate forecasts, propelled this movement. Economic data from China and the U.S. also influenced market dynamics, with concerns over China’s economic growth and a softer U.S. labor market.

Fed Chair Powell’s speech at Jackson Hole indicated a cautious, data-dependent approach to monetary policy. Overall, there was growing optimism that the Federal Reserve might not need to raise rates further. However, the possibility of a prolonged high-interest-rate environment continued to weigh on equities, sending the Nasdaq and S&P 500 closer to correction territory by the end of August.

Q4: Balancing Optimism with Economic Realities

U.S. financial markets continued to show resilience during Q4 in the face of challenges. Moody’s downgraded the U.S. credit rating outlook to negative due to higher interest rates and government spending concerns.

Despite this, stock indices saw a sharp rebound from a correction made in late October, bolstered by strong tech sector performance. The SPDR Technology Sector ETF XLK pushed to an all-time high in mid-November. Cooling inflation and the increasing likelihood that the Federal Reserve will keep rates unchanged have further fueled market optimism. Still, the market outlook remains cautious. The inflation

rate still hovers above the Fed’s 2% target rate, and many major retailers predict slower-than-expected spending heading into the holiday. So, while the U.S. economy has avoided a recession this year, it’s not out of the woods just yet. That said, payroll growth, consumer spending, GDP, inflation cooling, and the presumed end of the Fed’s hiking campaign might contribute to a soft landing.