Highlights

• 2023 was a sharp contrast to 2022 as most global markets rallied significantly
• Bond markets ended the year in the green after a topsy-turvy ride
• Bitcoin and gold rallied while other past winners faded during the year
• Many large questions face the markets entering 2024

US Markets

Major US indices rallied significantly in 2023, especially during the fourth quarter when it became clear that the Federal Reserve had completed raising interest rates for the time being, and even signaled that rate cuts are likely during 2024¹.

As the chart above shows, December was a life saver for both the Dow and Small Cap Equities (Russell 2000). The bulk of market gains during 2023 were driven by mega-cap tech stocks such as Facebook and Nvidia. The chart below shows the discrepancy between the performance of the ‘Magnificent 7’ (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG and GOOGL), Amazon (AMZN), NVIDIA (NVDA), Tesla (TSLA), Meta Platforms (META)) and the rest of the S&P 500.

There was a marked performance difference between ‘Magnificent 7’ and the remaining stocks in the S&P. Each stock in the group outperformed the S&P by ~20%+, with the highest flyers jumping more than 100% during the year.

Without the inclusion of these seven stocks, the S&P would have returned 10.39% as opposed to 26.29% for the complete index. This meteoric performance drove the Nasdaq to a 43% gain for the year as the ‘7’ are core pieces of that index and have an outsized impact on index returns. 

Investors should keep in mind that these 7 stocks make up more than one quarter of the S&P 500 and more than 50% of the Nasdaq², meaning that the performance of each index will be largely driven by the performance of 7 stocks, whether in a positive or negative direction.

These performance discrepancies impacted sector returns during 2023 as well. The top performing sectors for the year were Technology and Communications Services, sectors that hold these 7 stocks. Below you can see that the discrepancy between top and bottom sectors during 2023 was extreme, with a 54% performance gap between Tech and Utilities.

In contrast to the high flying performance of the aforementioned sectors, four sectors ended 2023 either flat or negative; Energy, Utilities, Consumer Staples, and Health Care either detracted from S&P performance or were flat. 

These same results were reflected in factor returns as the Growth factor outperformed all other factors during the year. In contrast, Low Volatility was the worst performing factor during the year. Investors showed a clear bias towards more volatile faster growing stocks during 2023.

Value and Quality factors also showed good performance largely in line with the broad S&P 500 returns. 

Again, these results are largely explainable by both the sector returns shown above and the star 7 stocks that have driven market performance for the year.

Global Markets

Global markets, much like their American cousins, saw robust performance during 2023, save for troubling markets in China. Taiwan, Brazil and Germany led the way while the UK and the aforementioned Chinese markets lagged compared to their peers.

Chinese markets couldn’t seem to shrug off troubling economic news and large problems in the housing sector³, and the market responded by declining over 10% for the year.

Much like US markets, the 4th quarter, especially December, drove values higher. These gains were driven by the Fed signaling an end to rate hikes⁴ along with other global economies inching closer to a rate cut cycle.

Fixed Income Markets

While equity markets had a mostly upward trajectory during 2023, the same cannot be said for the rollercoaster ride fixed income markets rode during the year. Intermediate and longer dated fixed income securities started off the year well, before crashing between 10-20% during the summer months, only to rally on the Fed’s changing stance towards rate hikes.

After inflation cratered during the depths of the COVID crisis, it reared its ugly head in 2022 and most of 2023. During the latter half 2023 inflation began to cool and this in turn influenced Fed positioning, which in turn sparked an end of year market rally.

This easing in inflation in the US and elsewhere around the world led to decreasing global bond yields as the year came to a close. Inflation in Europe and China dropped significantly during the later stages of 2023, providing opportunities for central banks to back away from aggressive rate increases.

Global bond yields dropped significantly during November and December, falling below where they began 2023 in most cases.

Alternative Assets

BitCoin was the clear winner during 2023, rallying more than 150%, while most other alternative assets had more hum-drum years. Natural Gas and Wheat, both of which spiked significantly after the beginning of the conflict in Ukraine⁵ continued to retreat from previous highs during 2023, logging losses of 20% or more while gold saw modest gains, but nothing too spectacular.

Happy New Year All! 🎉

What to Look for in 2024

1) Will the Federal Reserve stick to the course it signaled in 2023? Or will fixed income and equity markets see Fed driven volatility?

• Current expectations of a rate cut are already fading as odds of a March rate cut have been cut⁶.

2) Will the Magnificent 7 continue to drive stock prices in a positive direction, or will 2024 be more like 2022, where major tech stocks were among the worst performers

3) Can the US avoid a hard landing and recession in 2024 (see current implied odds below)?

4) How will AI continue to influence the way we work and run our lives, and what does that mean for markets? Will an early winner in the AI space emerge?

5) Will investors move off the sidelines and start investing some of the 2.5 Trillion dollars that has flowed into money markets over the past 5 years? And if so, where will they allocate those funds?

6) Will the Lions, yes the Lions, win the Super Bowl? 🙂