We are enclosing your portfolio reports for the fourth quarter, which ended December 31, 2023. For the quarter, U.S. stocks rallied with the S&P 500 gaining 11.7%. International stocks also rose, with the MSCI EAFE increasing 10.4%. Bonds gained, with the Bloomberg Barclays Aggregate Bond Index returning 6.8%.
2023 delivered a very nice return for investors, reversing course from the previous year. The S&P 500 gave returns of 7.5% for the first quarter and added an additional 8.7% for the second quarter. The market retreated from summer highs in the third quarter, handing investors a loss of –3.3%. The fourth quarter ended the year with a sharp rally that delivered an 11.7% increase, capping a handsome gain of 26.3% for the year. The S&P 500 ended the year just 0.5% shy of the all-time high, which was recorded on the first trading day of 2022. 2023 generally reclaimed the ground lost in 2022, essentially taking investors on a two-year round trip.
The market was primarily led last year by a small group of mega-cap tech stocks coined the “Magnificent Seven.” These high-flying tech stocks consist of Meta Platforms, Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla. According to a recent Wall Street Journal Article, the Magnificent Seven through mid-December had risen 75% in 2023 versus 12% for other 493 companies in the S&P 500. The index at the article’s writing had risen about 23%. The Magnificent Seven have risen so much in recent years that they now make up about 30% of the index. The tech-heavy Russell 1000 Growth Index (which includes the Magnificent Seven) was up 42.7% for the year. By contrast, the Russell 1000 Value was up only 11.5%, and the Russell 2000, which measures small cap companies, returned 16.9%. While it was a good year for the market overall, the most significant gains came from a very concentrated segment. The main takeaway is that only those who loaded up on this select group of mega-cap tech stocks had any chance of outperforming the market in 2023.
“Magnificent Seven” in 2023
*This graph is not intended to recommend any investment or investment activity.
Most of the volatility in the market over the past two years can be attributed directly to the Federal Reserve’s moves to tamp down inflation. Beginning in 2021, following the extraordinary stimulus measures and supply disruptions that occurred during the COVID-19 pandemic, inflation began to rise to worrisome levels. In early 2022 the Fed reacted and began an aggressive campaign to raise interest rates and tighten financial conditions. In the past, the Fed raising interest rates has led to recessions. Many argued this time around that a recession was, in fact, the goal of the Fed to bring inflation back down. However, in a surprising turn of events, inflation has returned to acceptable levels, unemployment remains low, GDP continues to grow, and the much-feared recession never materialized. The Fed, at this point, seems to have done the impossible; thread the needle on policy without seriously damaging the economy. The market has since responded, in kind, with a relief rally that began in earnest when the Fed signaled that they were done raising rates and that their next, most likely move would be to start lowering rates sometime later this year.
Following the wild round trip ride of the last two years, many now wonder what the future will bring. Although the Magnificent Seven reached astonishing heights (and valuations) this year, the rest of the market has broadly marked time. Prices have generally returned to their previous highs, while in the meantime, the underlying fundamentals have gotten stronger. The much anticipated recession has not materialized, and most strategists and economists have removed that possibility from their near-term forecasts. As such, we are cautiously optimistic that market gains will broaden to other (non-mega cap tech) areas of the market and we will see a smoother (and upward) trajectory in the coming year. However, there are still plenty of catalysts for volatility, not least of which is the upcoming Presidential election and the rancor surrounding the competing campaigns.
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