Market Commentary December 31, 2023
S&P 500 Equal Weight
Bloomberg US Int. Term Corporate Bond
There is a common saying about the weather that seems universal and it’s that if you don’t like it “just wait a minute.” This statement appears to be applicable to markets as well with what was a very poor third quarter turning into a very pleasant end of the year.
After stocks were broadly down for the previous quarter, the S&P 500 rallied 11.2% in the fourth quarter (Q4) to close the year up 24.2%. In a break from a trend that had persisted through most of the year, the breadth of the rally was much wider as the Equal Weighted S&P 500 returned slightly better at 11.3% for the quarter and finished the year up 11.6%. International stocks fared well with the MSCI EAFE index finishing the quarter up 4.6%, bringing performance for the year up to 13.0%.
Q4 of 2023 was truly an astounding quarter for bond markets. Volatility had been the story of the year – and indexes were approximately flat as we entered the quarter. Things changed very quickly as bonds rallied (yields decreased) dramatically through the fourth quarter. In a seemingly impossible coincidence, the 10-year US Treasury yield ended the year essentially where it began in 2023 after having traded consistently much higher throughout the year. The rally in bonds drove the Bloomberg US Intermediate Term Corporate Bond Index up 5.9% for the quarter, finishing the year up 7.3%.
The broad market rally in stocks and bonds was driven in part by what was seen as the long-awaited “Fed Pivot.” Throughout this latest rate hike cycle, as we have previously discussed, market expectations for the Fed’s peak short-term interest rate target moved higher and higher while the expected timing of future rate cuts had been pushed out further and further. With the Federal Reserve holding rates steady at the Oct/Nov meeting and comments in the press conference that followed alluding to rates having potentially peaked, the markets got all the signal they needed to rally. The S&P 500 increased 12.6% from the November 1st Fed press conference to the end of the year.
Going into a new year there are still plenty of questions on the horizon for investors to chew over. Particularly, the future of Fed interest rate policy decisions will still be driven by inflation and labor market data. Currently both of those factors appear to be reinforcing the idea that the Fed has likely concluded hiking interest rates. The current run rate of the Federal Reserve’s inflation target is approaching its 2% target, and the labor market, while still tight, has loosened slightly in the past couple months.
As we look at longer-term rates, such as the 10-year US Treasury yield, market expectations for things like economic growth become much more of a factor. Currently, short term-rates are much higher than long-term, a scenario known as an “inverted” yield-curve. This is unusual as typically the interest you can receive on an investment like a Treasury bond increases the longer you are willing to invest, e.g. a 10-year bond would pay a higher rate of interest than a 2-year bond. Inverted yield curves typically signal economic difficulty, (e.g. a recession is on the horizon). Both the current length and magnitude of the inversion are at extremely high levels. Basically, the bond market has been anticipating a recession for roughly the past 18 months. Recession fears have been driven by an expectation the Fed would essentially have to put the economy into a recession through higher short-term lending rates to tame inflation.
The fact that a recession has failed to materialize broadly so far has been remarkable to many economists while leaving some feeling like a slowdown in the economy is imminent. In the fall we attended a large investor conference with numerous presentations on the current state of the markets and economy. One compelling concept we heard was the idea of “rolling recessions” where different industries and sectors of the economy have gone through their own “mini” recessions and recoveries at different times resulting in an overall economy that has remained resilient, despite pockets of weakness.
As always, if you have questions regarding your portfolio, please consult your financial advisor. We appreciate your continued trust in SG Long Financial and look forward to working with you in the future.
Rob Richardson, CFA
Chief Investment Officer
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