It wasn’t pretty and it wasn’t smooth, but in the end it mostly all worked out! A perfect scenario would include a longer term “catch-up” from all the broad diversifying equity asset classes; we shall see!
Certainly, 2023 was OWNED by the “Magnificent 7” (Apple, Microsoft, Amazon, Google, Nvidia, Tesla, and Meta) with a quick attempt at a catch-up during Q4 for everyone else! Those 7 stocks overwhelmed the other 493 stocks in the S&P 500 with a combined +106% 2023 return helping the S&P 500 (IVV) close the year at +26.3%; just a smidge away from an all-time high! S&P 500 performance, however, took a back seat during Q4 as small cap equities (SCHA, +14.7%) were best in Q4, with the S&P 500 still best for all of 2023; hopefully, the relative performance of small cap and other equity diversifiers can keep up the good performance into 2024 and beyond!
The economic backdrop and special factors in 2023 certainly supported this phenomenal recovery from 2022 (see table below). It all started with a diligent Fed holding rates higher early in the year to help quell inflation. Then, later in the year, economic statistics trended towards positive results with the Fed confirming a need to “pause” tightening monetary policy with a potential “easing” in 2024. Combine this with the positive business dynamics of the potential for AI (artificial intelligence) to boost the tech business and potentially transform all businesses and there were plenty of reasons to cheer! However, the troubling backdrop of raging geopolitics persisted including the Ukraine/Russia and Israel/Hamas wars.
The table above shows the relative performance of the major asset classes that I follow. It is encouraging to see that all asset classes recovered mightily from the depths of Q3. I reported back in Q3 that there were glimmers of hope for the markets including “mostly stable credit spreads in the bond markets, stable industrial production, stable unemployment, and rising consumer sentiment” but it seems that the Fed “pause” in Q4 was the impetus needed to propel all markets higher.
During the depths of Q3 when markets were struggling, it was easy for the negative market psychology to overcome rational thinking. However, as I stated in my November 21, 2023 blog post, And Now For Something Completely Different!, some positive factors teased a recovery:
As it relates to the current market environment, we may be in the early stages of something modestly different in the form of an inflection point and some normalization of many of the key factors driving market returns.