2023 Annual Market Recap

Annual Market Summary:

• US Annual (2023) Recap: Dow +13.70%, S&P +24.23%, Nasdaq +43.42%, Russell 2000 +15.09%?(FactSet) 
• US equities were higher in 2023, with the Dow, S&P, and Nasdaq more than erasing their 2022 slides. The Dow set a fresh all-time high while the S&P ended the year within 0.56% of its January 2022 record close. The trend for the S&P was generally higher, though stocks pulled back through Q3 (and bottomed in late October) before rallying into year-end. Huge rallies by several mega-cap tech names (dubbed the "Magnificent Seven") were a big driver of overall index performance, and narrow market leadership remained a nagging concern for much of the year; the equal-weight RSP gained 11.7% but remained a laggard to the official S&P 500 index. Semis were very strong; AI optimism was a major theme among tech stocks. Homebuilders rallied as markets began to feel that 2024 would bring rate cuts from the Fed. Retailers were helped by persistent consumer strength. Software, cruise lines, hotels, steel, and building materials were some other areas of strength. Among the year's laggards were utilities, energy, food, drug stores, managed care, pharma (outside the GLP-1 drug developers), fertilizers, and lithium. (FactSet) 
• For the year, Treasuries were mixed with the curve steepening. However, this simple statement disguises a March slide in yields sparked by the banking crisis, a yield run-up into October alongside the Fed's "higher for longer" mantra, and a notable drop back down into year-end amid rising market expectations for rate cuts as soon as H1'24 (first half of 2024). The dollar posted an annual decline for the first time since 2020, seeing weakness on the euro and sterling crosses. However, the greenback was notably stronger against the yen. Gold was up 13.4%, rising after two consecutive years of decline and setting a fresh all-time closing high of $2,093.10/oz. Oil was weaker for the year, with WTI crude settling down 10.7%. Crude received no lasting boost from Mideast geopolitical uncertainties, while there remained concerns about an anemic China recovery, fractures within OPEC+, and rising non-cartel output. (FactSet) 

S&P 500 Annual (2023) Sector Performance: (Source: FactSet)

• Outperformers: Tech +56.40%, Communication Services +54.36%, Consumer Disc. +41.04% 
• Underperformers: Utilities (10.20%), Energy (4.80%), Consumer Staples (2.16%), Healthcare +0.30%, Real Estate +8.27%, Financials +9.94%, Materials +10.23%, Industrials +16.04% 

What happened last year?:

• The market entered 2023 under something of a cloud, with many marquee analysts baking a recession into their forecasts (though there was some difference of opinion about timing and duration). Some of the more bearish outlooks discussed the high-rate backdrop, fears of a consumer pullback, risks to corporate earnings, and geopolitical uncertainties. But in this past year, the real story was about mounting expectations for a dovish Fed pivot, continued spending by the US consumer, and resilient corporate earnings that are expected to post double-digit growth in 2024. In short, hard-landing fears gave way to a broader soft- or no-landing economic consensus. (FactSet) 
• Fed rate policy was at the heart of the 2023 narrative. December 2022 had seen a 0.50% FOMC hike after four straight 0.75% moves higher, with Chair Powell maintaining the hawkish tone that the Fed had more work to do in taming inflation. Through this July, the FOMC voted for four additional 0.25% hikes (up to a 5.25-5.50% Fed funds target rate), with the Fed continuing to largely voice its "higher for longer" mantra and the market debating where the ceiling would be; but all the while Powell continued airing his hopes for an economic slowdown without a hard landing, and by October, Chicago Fed President Goolsbee said the economy might still be on a "golden path." When dovish elements appeared out of the December 2023 Fed meeting (including dot-plot forecasts for 0.75% in rate cuts in 2024), it sparked an equity rally and Treasury yield slide that carried into year-end. (FactSet) 
• A key element in the Fed's decision making was continued progress on moving inflation back toward the 2% target. While y/y headline CPI peaked in June 2022 at 8.9%, that figure had dropped to 6.4% by December 2022 and to 3.1% by November 2023 (with some higher numbers in August and September amid a runup in energy prices). Core prices dropped to a 4.0% y/y increase by November's report, in contrast to last December's 5.7%, with services prices (particularly sticky shelter prices) remaining firmer. November 2023's core PCE, the Fed's preferred inflation measure, was up only 3.2%, the lowest reading since April 2021. At the same time, there seemed to be increasing confidence that the Fed has inflation on the run; the December UMich consumer sentiment report noted that respondents' year-ahead inflation expectations had dropped to their lowest level (3.1%) since March 2021. (FactSet) 
• The labor market also continued to loosen, easing an avenue of potential inflationary pressure. Job openings eased but remained well above pre-pandemic averages; growth in nonfarm payrolls remained positive but pulled back from 2022 levels (and more recent months saw downward revisions). Average hourly earnings, which rose more than 5% in 2022, were only up 3.6% for the year through November. And this downshift did not see any kind of spike in unemployment claims, though the ticking-up in continuing claims has received some attention in recent weeks. On-the-ground reports from the Fed's Beige Book noted employers were still seeing some difficulty hiring, especially for higher-skilled positions, but at the same time felt more comfortable letting go of weaker performers in contrast to the "labor hoarding" reflected in other reports. And all the while, consumer spending remained resilient, with November retail sales up more than 4% y/y amid what was considered to be a healthy holiday shopping season. (FactSet) 
• At the close of the year, the path of least resistance for the market appears to remain tilted toward the upside, though there is still a bearish case to be made. The S&P currently sits near the midpoint of major analysts' 2024 outlooks, which remain split on the possibility of a recession and whether corporate earnings can remain resilient in the face of headwinds from deflation, weakening pricing power, and elevated rates. Sentiment and positioning dynamics may have shifted from a tailwind to a headwind, and overbought concerns remain. Market expectations for Fed easing may be more aggressive than what the Fed has in mind, and investors may wait a while for rate cuts to materialize. (FactSet) 
• All that said, the market has seen notable momentum in recent weeks, with FOMO a definite factor. The most recent Fed communications featured a dovish tone. Equities have seen many recent weeks of inflows, and there has been a lot of attention on the amount of cash still on the sidelines. Market gains, once narrowly contained to a handful of tech stocks, have broadened out. Rotation dynamics to under-owned laggards have been seen as supportive. Investor sentiment is at its most positive level in nearly two years. And though a recession remains a possibility, expectations are that it may be mild and/or short-lived. (FactSet) 

Notable 2023 headlines:

• AI-related stocks had a big year, particularly NVDA. There was broad enthusiasm for the potential of ChatGPT and other Large Language Models (LLMs), and many large tech names entered the arena. But the meteoric rise of the technology also sparked calls for increased regulation and oversight, while widespread adoption also served to highlight its current limitations (with AI's tendency to "hallucinate" generating a lot of headlines). (FactSet) 
• Promising new GLP-1 obesity drugs shifted thinking around multiple market sectors. LLY's tirzepatide (Zepbound/Mounjaro) and NVO's semaglutide (Wegovy/Ozempic) both showed the ability to assist in weight loss for some patients, raising the prospect of lower overall incidence of Type 2 diabetes, which was a headwind for some medical device manufacturers; snack-food manufacturers and retailers also had to confront the possibility of weaker consumption trends. (FactSet) 
• March saw the market confront a banking crisis that saw Silicon Valley Bank, Signature Bank, and First Republic Bank ultimately collapse amid the impact of the Fed's aggressive tightening campaign on investment portfolios and accelerating deposit flight. However, the Fed quickly announced it would protect uninsured deposits at the institutions, and contemporary fears about a broader contagion effect ultimately proved unfounded. (FactSet) 
• Washington dysfunction was on full display this year, particularly with the months-long, winding road that led to a bipartisan deal to raise the US debt ceiling just a few days before a possible default. Government-funding talks also kept prospects of a government shutdown alive during the back half of the year. A deal on a continuing resolution at the end of September punted the crisis point to November, though it also sparked a defenestration of House Speaker McCarthy and a chaotic race within the GOP to replace him. Another continuing resolution in November means the issue will return to prominence in mid-January. (FactSet) 
• Geopolitics continued to fill the front pages, though the market characteristically took little lasting notice. The war in Ukraine continued to grind on without much sign of a diplomatic off-ramp; US-China tensions remained elevated and sparked more import/export restrictions. There were broad concerns that the 7-Oct attack on Israel by Hamas could devolve into a wider, regional Mideast conflict; but despite an Israeli ground invasion of the Gaza strip and international calls for a ceasefire, the struggle has remained largely contained. At year's end, the focus is on Houthi attacks on Red Sea shipping, though this may be returning thanks to an international protection initiative. (FactSet) 

It is our pleasure to serve you! We created Market Insight to keep you informed and up to date on our current industry focus, as well as areas of concern and interest to our firm and clients. Our team will continue to closely monitor market and economic news and trends; we are actively tracking ongoing developments in the Middle East and other parts of the world and will share with you significant economic and market impacts. 

Market Insight is one of the many ways you and your family can benefit from your relationship with Poljak Group—in addition to access to world-class resources, including leading investment research, expertise and technologies offered through our strategic partnership with Raymond James and Steward Partners. Please stay tuned each week for new editions of Poljak Group’s Market Insight newsletter and review past issues on our website at www.PoljakGroup.com. For questions or concerns or to schedule a meeting for specific investment advice, please call us at (318) 674-4100.

Our clients are our top priority. We look forward to hearing from you!