Fourth Quarter 2023 Update

January 1, 2024

Key Points

• The US economy grew at a surprisingly fast pace in the third quarter of 2023, posting its fifth consecutive quarter of growth at or above its potential. The economy’s resiliency has been mildly surprising to economists, as many had expected the economy to by this time dive into a recession as a result
• Stock prices were mostly higher in the quarter following the third quarter’s losses
• Fixed income securities’ prices were sharply higher (and yields lower) during the quarter, as the bond market rallied on tempering inflation concerns

4th QUARTER 2023 MARKET COMMENTARY

Below, we’ve highlighted 2023 broad market returns for the current quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy grew at a surprisingly fast pace in the third quarter of 2023, posting its fifth consecutive quarter of growth at or above its potential. The economy’s resiliency has been mildly surprising to economists, as many had expected the economy to by this time dive into a recession as a result of the steep hike in interest rates implemented by the Federal Open Market Committee (FOMC). Against this backdrop, the Bureau of Economic Analysis released the third estimate of the third quarter 2023 real GDP, a seasonally adjusted annualized rise of 4.9%, a decline from the 5.2% prior estimate, but a marked increase over the previous quarter. The employment situation remained a mixed bag in the quarter. The November employment report showed that employers added 199,000 jobs in the month, and that the unemployment rate was slightly lower at 3.7%. The FOMC maintained its federal funds rate target range at 5.25% to 5.50% as inflation data trends lower. The FOMC provided a dovish outlook on interest rates, and many analysts believe interest rate cuts could begin soon.

EQUITIES

Stock prices were mostly higher in the quarter following the third quarter’s losses. Except for stocks in one sector, gains were broad. The economy’s continued resiliency, gains in the labor market, and moderating inflation has encouraged analysts, and the sharp decline in interest rates has given a boost to stock prices. For the first several weeks of the quarter the S&P 500 trended lower, before then marching higher throughout the remainder of the quarter. When the quarter ended, the S&P 500 Index had advanced 11.7%, and finished the year with a gain of 26.3%.  Within the large cap segment, growth stocks significantly outperformed value stocks. Small cap stocks, as represented by the Russell 2000 Index, outperformed large caps, and finished the quarter with a total return of 14.0%. International stocks generated positive results during the quarter, and generally were in line with US equities The MSCI EAFE Index of developed markets stocks was higher by 10.4% and Emerging markets stocks were higher, as the MSCI Emerging Markets Index advanced by 7.9%

FIXED INCOME

Fixed income securities’ prices were sharply higher (and yields lower) during the quarter, as the bond market rallied on tempering inflation concerns.  The FOMC at its latest meeting signaled that it would maintain its current federal funds rate target range of 5.25%-5.50% as the data show that inflation is beginning to trend lower. Because of the encouraging trend in the data, the FOMC’s statement and outlook were eagerly anticipated by economists and analysts who were looking for an indication as to when the FOMC may reverse course and begin to lower rates once again.  Many economists believe the committee’s efforts have been enough to bring inflation back to its target rate of 2% to 2.5%, and that the FOMC may begin to cut rates sometime as soon as the first quarter of 2024.

SUMMARY

The economy has shown signs that it is on a glide-path to a “soft landing,” where the FOMC increases interest rates to tame inflation, but the economy simultaneously averts recession. The resilient economic growth and job market gains have surprised many economists, and while there remain risks to the downside, conditions are such that some analysts say the economy may also surprise to the upside, and be stronger than expected. Employers are adding jobs in large numbers, even though at levels lower than earlier in 2023, and gains are not so outsized that they are of concern to the FOMC. In addition, the unemployment rate has remained below 4% for two years, the longest period since the 1960s. Another bright spot has been the decline in oil prices, which had remained elevated due to Russian sanctions and the Biden administration’s drawdown of the Strategic Petroleum Reserve. Home prices have held up better than expected, although many analysts warn that further declines in the segment are likely. The consensus for 2024 among economists and analysts is one of cautious optimism, as the FOMC is expected to begin lowering interest rates, and inflation is anticipated to continue to trend lower. Risks to the outlook include a monetary policy misstep, an unexpected surge in oil prices, and geopolitical tensions. In addition, the 2024 presidential election campaign will come into increasing focus for investors.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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