Equity markets rebounded in the fourth quarter 2023 with the S&P 500 Index1 up 11.7%, and finishing the year up 26.3%. This was a welcome performance after the steep declines experienced in 2022 as the Federal Reserve was battling high inflation. Inflation figures fell to tolerable levels during the year and the Federal Reserve paused their interest rate hiking cycle, with the potential to keep rates “higher for longer”. The Magnificent 7, seven mega-cap companies (Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla), were up on average 76% during the year and contributed to more than half of the S&P 500 Index’s rise. All of these companies benefitted from the hype around artificial intelligence (AI) and will have to show it’s merit in their earnings to keep their stretched valuations.
In a reversal from the third quarter, when most of the S&P 500 sectors finished with negative returns, only the Energy sector was down during the fourth quarter losing 6.9%. The top 3 sectors were Real Estate (+18.8%), Technology (+17.2%), and Financials (+14.0%).
From an investment style perspective, small cap value companies reigned supreme during the quarter up 15.3%. Other than small caps, growth outperformed value within mid- and large-cap companies. With higher interest rates, small cap growth companies continue to struggle the most as they rely more on borrowing to raise capital.
In foreign markets, all the major indices were positive with the exception of the MSCI China Index which was down -4.2% during the quarter. In 2023, China experienced a real estate crisis, weak consumer spending, and higher youth unemployment which led to poor performing equity indices. The leading region during the quarter was MSCI Europe Ex-UK which was up 12.3%.
The 10-year Treasury yield reached 5% during 2023, but ended in the same spot it started the year at 3.88%. With the Federal Reserve taking a pause on increasing interest rates, the fixed income markets rallied back in 2023 and all major sectors ended in positive territory. The leading sectors in the fourth quarter were the riskier parts of the market – Emerging Market Debt (+9.7%), Global Ex-US (+9.2%), and Corporate (+8.5%).
Gross Domestic Product, or GDP, spiked upward to a 4.9% annualized growth rate in the third quarter 2023, up from a 2.1% growth rate in the second quarter. The increase was largely due to a strong consumer consumption during the summer months. GDP increased at an annual rate of 3.3% in the fourth quarter of 2023. Compared to the third quarter of 2023, the deceleration in real GDP in the fourth quarter primarily reflected slowdowns in private inventory investment, federal government spending, residential fixed investment, and consumer spending, as the economy begins to normalize.2
The December jobs report showed employers added 216,000 jobs to the economy while the unemployment rate remained at 3.7%. The hiring increase came from a gain of 52,000 jobs in the government sector and another 38,000 in health-care related fields. The U.S. labor market finished strong in 2023 with 2.7 million jobs added. The average hourly earnings rate rose 4.1% in 2023, which was above the estimate of 3.9%.3
The headline Consumer Price Index (CPI) rose 0.3% for the month of December and was up 3.4% over the past year, primarily driven by continued higher prices for shelter and transportation services. The index for shelter contributed to over half of the headline index increase in December. Core CPI, which excludes food and energy, moved slightly lower to 3.9%. Lower fuel prices have led to the continued downward trend in inflation.3
Sources:
- The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market.
- Source: Bureau of Economic Analysis, U.S. Department of Commerce
- Source: U.S. Bureau of Labor Statistics
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