In this latest installment of our newsletter, we share our observations of the markets and the economy in 2023 and our outlook for 2024. Click here to go to the full report on our website. Following are the highlights:
- Investors found much to celebrate as 2023 came to a roaring close. The market’s positive momentum accelerated in the fourth quarter, sending all major stock indices at or near record highs in December.
- Bolstered by the combination of a solid economy, better-than-expected corporate earnings, and the anticipated end to the Federal Reserve’s long rate-tightening cycle, stocks rallied strongly in the 4th quarter to finish out the year on a high note. It was a significant reversal of the pessimism many investors felt at the start of the year.
- The S&P 500 index posted an 11.7% total return for the fourth quarter – its best quarterly performance since late 2020 – and an impressive 26.3% total return for the year.
- The Bloomberg Barclay’s Aggregate Bond Index erased a modestly negative return for the first nine months of the year, rallying in the fourth quarter to post a positive 5.5% total return for the full year 2023, avoiding what could have been a third straight year of losses for bonds.
- Driving the late-year rally of both stocks and bonds was investor optimism that, in addition to ending rate hikes, the Fed may start to cut interest rates sooner than expected.
- After maintaining a stance for months that investors should not expect rate cuts anytime soon, the Fed released new economic projections in mid-December that suggested the possibility of three rate cuts in 2024.
- The primary rationale for the Fed’s pivot on rates has been the decline of inflation from its peak in June 2022. Overall, inflation has cooled considerably from its peak of 9.1% in June of 2022 to a reading of 3.4% in December 2023. If it continues its downward trend, it will support the narrative that the Fed should be able to “give back” some of its interest rate hikes sometime in 2024.
- The U.S. economy has remained remarkably resilient, particularly in the face of calls by many at the start of the year for an inevitable recession. Instead, the U.S. economy has been characterized by continued low unemployment, strong GDP growth, and solid corporate earnings.
- Our outlook for the economy and markets in 2024 is cautiously optimistic. If the economy continues to grow at a solid pace and corporate earnings continue to rise, then the stock market should rise further in 2024.
- As far as valuation, the broad S&P 500 index is fairly valued at 19.3 times forward 12-month earnings, roughly in line with its 5-year average of 18.8 times.
- We have and will continue to find opportunities for our clients, particularly in sectors which have lagged the overall market and are thus attractively priced. We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities, like utilities and REITs, to benefit from a broadening market rally and potentially lower interest rates in the future.
- In the meantime, we are still favoring short-term Treasury bonds and money market funds at better than 5% annualized yields for client cash.
- Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to active security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.
The Edgemoor Team
