Market Update January 17, 2024
What a difference two months can make. Through October, some investors were likely questioning why they invest in stocks and bonds following three months in a row of negative returns for stocks and six in a row for bonds. Pessimism was running high which quite often can indicate a turning point for the financial markets. And turn they did, with incredible rallies in both stocks and bonds during November and December. These are the kinds of months when you do not want to find yourself standing on the sidelines, waiting to re-enter until the outlook is better. The outlook will always include clouds of concern.
The end result was a great year for stocks and bonds, a welcome change following the difficult year in 2022. Domestic stocks as measured by the technology-laden, large cap S&P 500 were up a whopping 26.3% for the year. The equal-weighted S&P 500 index was up a more modest, but still strong, 13.9%. Established foreign market stocks as measured by the MSCI EAFE index were up 18.2% and the MSCI Emerging Markets index was up a respectable 9.8%. Bonds as measured by the Bloomberg U.S. Aggregate index were up 5.5%. It was anything but a straight line, but a very good year once the dust settled.
Rising interest rates were the primary culprit for the volatility as fears rose that the Fed would hold their benchmark rate higher for longer to combat inflation. The yield on the 10-year Treasury bond started the year at 3.9%, trended sideways for the first seven months of the year, and then began a steady climb. It finally topped out in late October at 5%. Interest rates then reversed course, retracing their footsteps, and amazingly, the 10-year yield ended the year right where it began – a strange ride indeed. The drop in yields was fueled by easing inflation concerns and the Fed’s acknowledgment that it was done raising the Federal Funds rate and expected to begin cutting it in mid-2024.
Hopes are running high now that the Federal Reserve will be able to achieve a soft landing for the economy, i.e. a slowdown without pushing the economy into a recession. Soft landings are historically elusive. If the Fed keeps their Federal Funds rate too high for too long, they risk slowing the economy to the point of recession. If they cut rates too soon or too much, inflation could pick up again and the Fed would need to reverse course. The risk of a policy misstep is arguably the greatest risk to financial markets in 2024. We will inevitably see some volatility with this being an election year, but these eventually run their course.
It is encouraging that we saw wider participation by stocks in the year-end rally. Through the first three quarters of the year, the positive index return in our country was heavily driven by a small number of large technology stocks. However, in December the Dow Jones Industrial Average notched numerous all-time highs, besting its previous high hit nearly two years ago. New highs for this index had been far rarer than for the S&P 500, and it is an indication of broader strength in the stock market.
We look forward to connecting with you in the year ahead, and wish you a healthy and prosperous 2024.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged capitalization-weighted index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The Dow Jones Industrial Average index covers 30 major NYSE industrial companies. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Note that bond prices rise when yields fall, and vice versa, due to the inverse relationship between bond prices and yields. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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