by Tyler Ellegard, CFA
Posted on December 20, 2023
2023 was another year of twists and turns for investors as anxiousness and uncertainties turned into optimism and resiliency. As the story of the year concludes, investors have benefited from stocks pulling themselves out of a bear market and ending the year near or above prior all-time highs. Bonds have been mired in a very difficult period since the end of 2021, have shown signs of recovery but have also experienced much higher-than-normal volatility.
Investors who speak about “the market” are often referring to the S&P 500, which is up 26.2% (as of Dec. 19, 2023) this year and within 1% of setting an all-time high. The chart below shows the year-to-date performance and the twists and turns it has taken this year.
In retrospect, 2023 was characterized by:
- A mini-banking crisis with three failed banks
- A mass market introduction of artificial intelligence
- The “Magnificent Seven” stock rally
- The Federal Reserve’s ongoing battle with inflation
- A wild housing market with soaring mortgage rates
In February, which seems like ages ago at this point, three regional banks failed. First Republic Bank, Silicon Valley Bank, and Signature Bank were number two, three, and four, respectively, on the list of largest U.S. bank failures.1 Each of these banks, however, served relatively niche markets like startup businesses and cryptocurrency-focused companies. Fortunately, these bank failures turned out to not be a systemic issue and allowed investors to put aside any concern of contagion to the broader banking system.
A second market theme in 2023 was artificial intelligence (AI) going mainstream. Historically, technology related changes have typically disrupted large firms as new entrants change the way business is done. Thus far, most AI beneficiaries, such as Microsoft, Meta, NVIDIA, Alphabet, and Amazon, were already large companies that have grown larger. These companies, which are part of the “Magnificent Seven,” had an outsized positive influence on market returns due to their sheer size and returns.
The U.S. Federal Reserve was also a frequent newsmaker as the discussion on rate changes to control inflation dominated the headlines. The actions of the Fed had implications across asset classes, with the housing market probably feeling the most differential. As mortgage rates rose from 3% levels to nearly 8%, this was a sea change in affordability for purchasing a home and significantly curtailed activity.
While consumer prices have certainly tempered this year when compared to last year, inflation remains above the Fed’s target of 2%. This was the central reason why the Fed was so aggressive with interest rate increases. The chart below from the Wall Street Journal2 shows several other rate hiking cycles with the current cycle (black line – 2022) being the standout. The recent Fed pivot from an aggressive stance to control inflation (hawkish) to an easing stance (dovish), combined with resilient economic data, have been the primary catalysts for the market rally since November.
As you can see, 2023 certainly was filled with ups and downs. The above list doesn’t even include the ongoing military conflicts between Russia/Ukraine and Israel/Hamas. As we enter 2024, there are concerns around these events, an upcoming election, and many others that are unforeseen even now. One of the few constants of investing is that there are always concerns. This is the main reason that we advocate for a plan that includes both the ability to grow assets over an extended period but also creates a safety net for the potential of future difficulty. This is a central component to diversifying investment portfolios and being adaptive, but not emotional, when it comes to allocating your money to meet your objectives.