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Jan 02, 2024

Market Highlights 4Q 2023

Christina Siegel Malbon

2023 began with experts calling for a recession in the back half of the year, but the recession never materialized. Despite the most aggressive tightening cycle in 40 years by the Federal Reserve, the consumer remained resilient, buoyed by remaining COVID stimulus, a strong job market and continued wage growth.

Spending preferences shifted from goods to services in 2023, but expenditures continued. While credit card balances ended the year surpassing $1 trillion for the first time, consumers remain in a strong position with debt service payments as a percentage of disposable income sitting around its historical average (5.8%).

The Federal Reserve ended their rate hiking cycle in July. The last 25bps raise left the benchmark federal funds rate at 5.25-5.50%. Despite the Fed’s focus on keeping inflation under control, the dot-plot now indicates three rate cuts in 2024, up from two at the September meeting.

Inflation appears to be contained. Headline and Core PCE inflation have fallen to 2.6% and 3.2% year-over-year, respectively, the lowest level since 2021. The 3-month annualized Core PCE continues to improve, hitting 2.2%, close to the Fed’s 2.0% target. Meanwhile the Federal Reserve Money Supply M2, stayed in negative territory, down 3.0% over the last year.

The US 10-yr yield and 30-Year Mortgage rates fell to 3.9% and 6.4% from their highs in October 2023 of 5.0% and 7.8%, respectively.

For much of the year, market returns were concentrated in the Magnificent 7 (GOOGL, AMZN, AAPL, META, MSFT, NVDA, TSLA) which now account for 27% of the index. While returns broadened out late in the year, the top 7 names had a total return of 81.9% over 2023, compared to the 12.5% return of the remaining 493 stocks. Over the last month of the year, the equal weighted S&P500 outperformed the cap-weighted S&P500 though.

The S&P500 ended the year up 26.3% on a total return basis. The path wasn’t smooth, with an 8% and a 10% pullback along the way. The returns for 2023 more than double the long-term average, ranking as the 25th highest return year going back to 1927.

Despite strong returns, sentiment remains muted. We entered 2023 with investor sentiment in strong bearish territory registering a 2.9 out of 10 on the Bank of America Bull/Bear Indicator. Currently, investor sentiment is neutral with a reading of 5 out of 10.

The Nasdaq Composite recovered from its declines of last year gaining 44.7% in 2023, followed by the S&P500’s 26.3% gain and the Dow Jones Industrial Average’s rise of 16.2%. Nine out of the eleven sectors in the S&P500 posted positive returns for the year, the opposite of what we saw in 2022. The only sectors that were up in 2022 (Utilities, Energy) were also the only sectors that were down in 2023. Information Technology posted the strongest returns, gaining 57.8% for the year followed by Telecommunications which returned 55.8%.  Utilities were the biggest losers, a trend we saw throughout the year, declining 7.1% while Energy fell 1.4%.

Large-caps maintained their leadership outperforming both mid-caps and small-caps. The Russell 1000 gained 26.5% compared to the Russell Mid-Cap Index’s rise of 17.2% and Russell 2000 Index return of 16.9%. Growth recovered its lead over value, with the Russell 1000 Growth Index climbing 42.7% compared to the Russell 1000 Value Index’s gain of 11.4%.

Bonds returned to positive territory but dramatically underperformed stocks, with US Corporates outperforming long-dated US Treasuries with the Bloomberg Aggregate gaining 5.5%, better than the 2.7% return of 20+YR Treasuries.

The US Dollar declined 2.1% over the year while Gold gained 7.9%. Commodities were lower over the year with West Texas Intermediate (WTI) crude losing 10.7% and the Bloomberg Commodity Index declining 12.6%. Bitcoin posted an impressive rebound over the course of the year gaining 152.9% and ending at a value of $41,935.34, a level not seen since early 2022. 

Data sourced by Bloomberg.

The NASDAQ Composite Index is a market capitalization-weighted index that is designed to represent the performance of NASDAQ securities and it includes over 3,000 stocks. The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The Dow Jones Industrial Average (DJIA) is an unmanaged index composed of 30 blue-chip stocks, each with annual sales exceeding $7 billion. The DJIA is price-weighted, reflects large-cap companies representative of U.S. industry, and historically has moved in tandem with other major market indexes, such as the S&P 500. The Russell® 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The Russell Midcap® Index, an unmanaged index, measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Russell 1000® Value Index measures the performance of the large-cap value segment of the US equity universe. The Russell 1000 Growth® Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value® Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar- denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). The Bloomberg US Treasury: 20+ Year Index measures US dollar denominated, fixed rate, nominal debt issued by the US treasury with 20+ years to maturity. The Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. West Texas Intermediate (WTI) Crude Oil is the underlying commodity of the New York Mercantile Exchange's oil futures contract and serves as one of the main global oil benchmarks. CPI: Consumer Price Index measures the monthly change in prices paid by U.S. consumers. PCE: Personal consumption expenditures includes a measure of consumer spending on goods and services among households in the US. PCE, CPI, and inflation rates based on available data at the time the piece was written and are not guaranteed to stay the same in the future. M2 is the U.S. Federal Reserve’s estimate of the total money supply including all of the cash people have on hand plus all of the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). BofA Bull & Bear Indicator is Bank of America’s key investor positioning measure.

The views expressed in this commentary reflect those of Patient Capital Management analyst(s) as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Patient Capital Management disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results. 

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