The market ended 2023 with a memorable Santa rally. While most of the year saw extremely narrow leadership in the U.S., with only a handful of mega-cap stocks propelling the market returns and leaving all other names relatively flat, everything changed around the start of November as investors gained confidence that the Fed had finished raising rates, sparking the year-end rally.
Looking back on 2023, it was an eventful year marked by banking sector strains, shifting monetary policy, breakthroughs in Artificial Intelligence, and ongoing conflicts in Ukraine and Israel. While the market dropped early in the year upon the collapse of Silicon Valley and Signature Banks, the emergence of the Magnificent Seven and all things AI caused the market to begin to march higher. Throughout the second half of the year, the market had to contend with the Fed’s rate hikes until fall when market rates started to subside.
Since the beginning of November, a broad-based rally has lifted stocks and bonds. As we entered the week of Christmas, the Fed released new economic projections that suggest a likelihood of rate cuts in 2024, which added fuel to the market’s rally. After a rough late summer/fall stretch, investors had nothing but wonderful things happen to them over the last two months.
While the S&P 500 was already in positive territory for the year before the recent Santa rally, what’s been particularly significant has been how broad-based this rally has been, with most stocks joining in on the gains. For example, before the year-end rally, most of the stocks that comprise the equal-weighted index, less influenced by the stock-price movements of the largest companies, had been generally flat. But the latest rally includes almost 90% of all stocks in the index. Even small caps finally started to find strength in the past few weeks!
The Russell 2000 finished the year on one of its best two-month gains on record. With interest rates falling, small caps surged >23% over the last two months of the year. Historically, significant gains in small caps have been bullish for positive returns in the year ahead.
Europe and Asia also saw steady gains all year. Our non-U.S. portfolio delivered double-digit solid returns in 2023. Based upon current valuations relative to U.S. counterparts, we would not be surprised to see non-U.S. equities continue to perform well in the new year. Historically, exposure to overseas stocks as part of a diversified portfolio has led to long-term solid results and lower volatility.
Looking ahead into 2024, stocks probably have a good runway if the Fed remains on its current path of no further interest rate hikes. We are encouraged by the broad-based rally at the year’s end and hope it will continue to widen to include a range of stocks in the new year. The recent rally may have borrowed gains from 2024, but a pause for the market to consolidate gains is not unusual.
Another observation is that the S&P 500 hit its all-time highs almost two years ago, in early January 2022. This is a long time to remain below the previous all-time high. Looking at all bear markets historically, the market has taken a median of 48 months to return to the preceding peak. So perhaps we are due for new highs? We will have to wait and see.
As a reminder, market predictions are often incorrect more than not. There is always a wide range of market outcomes. This is why we always recommend that clients maintain a diversified portfolio of stocks and bonds to help mitigate risks and weather any potential market fluctuations.
As we head into 2024, we encourage you to reach out to schedule a portfolio review. We appreciate your continued trust in our firm and value your partnership. We look forward to working with you in the year ahead to achieve your financial goals.