2023 - The Year in Review

Key Takeaways

• After posting double-digit losses in 2022, stocks soared and bonds rebounded last year.
• Gains in the tech sector helped growth stocks outperform value stocks in the US, but the value premium was positive outside the US.
• Economic resilience in the US and elsewhere is helping boost the global outlook, but 2023 showed why planning for uncertainty is prudent.

It was a year that defied expectations by many accounts. A number of forecasts predicted that the US economy would enter a recession in 2023 as the Federal Reserve raised interest rates to fight high inflation. But the economy remained resilient, inflation eased, and the Fed declined to lift rates later in the year. US stocks rose in 2023, despite some setbacks along the way.¹ Many economists who called for a recession have since walked back their predictions. 

A year that many speculated would be lackluster for US stocks saw the S&P 500 post gains of 26.3% on a total-return basis, extending a bull-market rally that began in 2022.² Global stock markets also bounced back after posting their worst year since the financial crisis. Equities, as measured by the MSCI All Country World Index, rose 22.2% even as geopolitical tensions increased, with war continuing in Ukraine and hostilities erupting in the Middle East.³ Developed international stocks, as represented by the MSCI World ex USA Index, added 17.9%, while emerging markets notched smaller gains, with the MSCI Emerging Markets Index up only 9.8%.⁴

Inflation and the Fed

US inflation continued to retreat from June 2022’s four-decade high of 9.1%, with the 12-month rise in consumer prices falling to 3.1% in November, a lower level than many had expected.⁵ After raising rates three times in the year’s first half, the Fed made only one additional increase later in 2023. Policymakers indicated they will likely continue to hold interest rates steady, despite inflation remaining above its 2% target. Against this backdrop, even while the broad economy remained strong, some sectors, such as real estate and finance, lagged.⁶ Higher interest rates dampened home sales and new development activity. In the financial sector, the rapid rate increases in early 2023 left some regional lenders, such as Silicon Valley Bank, in precarious financial positions, with the value of their long-term Treasury bonds sinking. Many nervous depositors withdrew their cash, resulting in three of the four largest bank failures on record (after Washington Mutual in 2008).

Stocks Get a Big Boost from Big Tech

Among the strongest performers in 2023 were technology stocks, recovering after a poor showing in 2022. The tech-heavy Nasdaq rose 44.6%.⁷ Much of the stock market’s gains can be attributed to just a handful of companies, recently dubbed the Magnificent 7.⁸ They were led by NVIDIA amid strong sales of its computer chips, as interest in artificial intelligence built. However, valuations for those seven stocks remain high.

Magnificent 7 outperformance might be difficult to sustain; past gains don’t guarantee future ones. Rather than seeking additional exposure to these mega cap stocks, investors may be better off ensuring their portfolios are broadly diversified, positioned to capture the returns of whatever companies may rise to the top in the future.

The gains of the growth-oriented US tech sector helped growth stocks outperform value stocks on a global basis and in the US, despite a strong start and finish to the year for value. Historically, small caps and value stocks have outperformed large caps and growth stocks, respectively.¹⁰

A Roller Coaster for Bonds

In the bond market, US Treasuries rebounded after posting their worst annual return in decades in 2022, with the Bloomberg US Treasury Bond Index gaining 4.1% vs. the previous year’s 12.5% decline.¹¹ But it was not a smooth ride for investors. Despite rising bond prices generally, yields (which fall when prices rise) were higher than they have been for most of the past decade. The 10-year Treasury yield nearly touched 5% in October for the first time since 2007, before pulling back below 4% by year-end.¹² 

For the entire year, the 10-year yield was lower than that of three-month bills, keeping the yield curve inverted. While many investors see yield curve inversion as a foreboding signal of a recession or stock market downturn, data from the US and other major economies show yield curve inversions have not historically predicted stock downturns consistently.¹³ And no US recession was declared in 2023.

What’s in Store for ’24? 

Economic resilience in the US and elsewhere is helping boost the global outlook for 2024. Many variables are in play for markets this year, from wars in Ukraine and the Middle East to questions around interest rates. Investors are also likely to be closely following the upcoming presidential election in the US. But it’s worth noting that the political party that wins the White House is just one of many factors investors consider when pricing assets, and stocks have generally trended upward regardless of which party holds the presidency. This may be reassuring when one considers the difficulty, or perhaps futility, of trying to guess what is going to happen in 2024—or any year.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. Our advice remains consistent. Focus on what you can control. You do have a say in three of the most important factors in financial planning – how much you save while working, when you retire, and how much you spend during retirement. Stick to your plan and think long-term.

Best wishes for a happy, healthy and prosperous 2024!

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FOOTNOTES

  1.  Based on the 2023 calendar-year return of the Russell 3000 Index, which rose 26.0%.

1. 2.  S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

2. 3.  MSCI data © MSCI 2024, all rights reserved.

3. 4.  Based on the 2023 calendar-year returns of S&P and MSCI indices.

4. 5.  Inflation data as defined by the Consumer Price Index (CPI) from the US Bureau of Labor Statistics.

5. 6.  The real estate and financial sectors of the Russell 3000 rose 24.1% and 14.1%, respectively, vs. 26.0% for the index.

6. 7.  Based on the 2023 calendar-year return of the Nasdaq Composite Index. © 2024 Nasdaq Inc. All rights reserved. Returns are calculated from the total return index values.

7. 8.  The Magnificent 7 stocks include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. Named securities may be held in accounts managed by Dimensional.

8. 9.  Average P/B ratio for the Fama/French Total US Market Research Index from October 1993 through September 2023, the most recent data available.

9. 10.  The MSCI All Country World Small Cap Index has outperformed the MSCI All Country World Index by 2.4 percentage points, annualized, since 1999, the first year for which data is available.

10. 11.  Based on the 2023 calendar-year return of the Bloomberg US Treasury Bond Index. Bloomberg data provided by Bloomberg Finance LP.

11. 12.  Source: US Treasury.

12. 13.  Eugene F. Fama and Kenneth R. French, “Inverted Yield Curves and Expected Stock Returns” (white paper, 2019).

13. 14.  Based on the free float-adjusted market capitalization. Data provided by Bloomberg.

The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.