Market Commentary Fourth Quarter 2023
For the three months ending December 31st, the S&P 500 Total Return Index increased 11.69%, while the Bloomberg U.S. Aggregate Intermediate Bond Index increased 5.50%. For the year, the S&P 500 Total Return Index finished up 26.29%, and the Bloomberg U.S. Aggregate Intermediate Bond Index finished up 5.18%%.
Federal Reserve monetary policy remains in focus for 2024. The Fed’s decision to hike interest rates in July 2023 looks to be the final in the latest tightening cycle; now investors are looking to when the Fed will begin to cut rates. Much of this will depend on the economic data and the lagged effects of the tighter monetary policy of the last 18 months. The Fed’s “dot plot” suggests three cuts totaling 75 basis points during the year, while the Fed Fund futures are pricing in twice that amount. Recent inflation data has registered at approximately a 3% year-over-year rate, leaving the current 5.5% Fed Funds rates significantly above the neutral level.
Corporate earnings, as always, will be a focus. The consensus estimates call for steadily improving earnings growth in 2024, with mid-single-digit increases early in the year and low double-digit growth in the back half. The economy has shown great resilience, and the relatively strong consumer demand combined with moderating material and wage costs should fuel that earnings growth.
Much of the stock market’s performance in 2023 can be attributed to a small number of large company growth stocks; we will be watching for a rotation into other areas of the market that appear to be relatively undervalued. That rotation was evident towards the end of 2024, with small caps performing particularly well. Additionally, a rebound in dividend paying stocks and the interest rate sensitive Financial sector also seems to be underway.
Previous periods of market volatility have demonstrated that trying to time the market is a difficult and typically underperforming pursuit. For long-term investors, simply staying invested is the most prudent investment strategy. In addition, we encourage investors to manage risk by staying in their asset allocation range and maintaining a diversified portfolio.