Wealth Services

Monthly Market Update | December 2023

January 8, 2024

Monthly Market Summary

Current market and economic conditions

  • In December, the S&P 500 Index was up 4.54%, while the Bloomberg Barclays US Aggregate Bond Index was up 3.83% and the Bloomberg Barclays Municipal Bond Index was up 2.32%.
  • For all of 2023, the S&P 500 Index was up 26.29%, while the Bloomberg Barclays US Aggregate Bond Index was up 5.53% and the Bloomberg Barclays Municipal Bond Index was up 6.40%.
  • The stock and bond markets had a positive year, to the surprise of many who had predicted an economic downturn or worse at the beginning of the year.
  • With the Federal Reserve poised to begin reducing the short-term Fed Funds rate and the upcoming election, there is plenty of uncertainty to come in 2024. Successful investors know that uncertainty provides opportunity.

Bond market

  • With inflation continuing to recede, the Fed is now able to start bringing rates down. The most recent “dot plot” by the Federal Reserve reflects their expectation that short term interest rates will be hovering near 3.75% by the end of 2024. The futures market is currently forecasting the first reduction of the Fed Funds rate in March. The rising probability of lower interest rates has already been reflected in the bond market. The 10-year Treasury yield has fallen from almost 5% in October to below 4% currently. All of this has caused bond investors to rally to a positive year after two down years. While it does not make up for the bad year last year, it may signal that the bond market may be returning to a more stable footing going forward.
  • The question for the markets remains whether the Fed can engineer a soft landing for the economy. So far, the key indicators for economic growth – jobs, consumer spending, and industrial production are all showing positive, albeit slower growth coming into the new year. The red-hot job market is cooling, but job openings and layoffs are still reflecting a strong job market. This, in turn, allows consumer spending to continue to grow. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow. Fourth quarter GDP is now forecast to come in around 2%. This follows the unexpectedly fast growth in the third quarter revised to 4.9%.

Stock market

  • Large US stocks continued to lead the market in 2023. However, since the peak of interest rates in October, we have seen a broadening of leadership across the markets. Typically, when the economy is in recovery, small cap stocks tend to do well. Over the past 3 months, and especially in December, small cap stocks outpaced large cap stocks. The conundrum at the moment is that we have not gone into an actual recession. So how is it that the market is behaving like we are starting a recovery? Last year, the market was acting like we were going into a recession and beating down the valuations of small cap and international stocks all the while riding high with the large caps, especially the tech sector. With the market recognizing that we may have skirted past the recession, the market is acting like it is in a recovery by scooping up small cap stocks as it would during an actual economic recovery.
  • Election years always provide enough uncertainty to heighten the market’s anxiety. Historically, regardless of the outcome, the market is most volatile during the primary season as the swings in voter sentiment cause uncertainty regarding which candidates will prevail for each party. Typically, this volatility eases around the end of May. Based on research conducted by Capital Group, during an election year, the average return for the stock market for the 12 months from May 31 is 11.3% since 1932. For the same 12-month period in non-election years, the return is only 5.8%. As was stated earlier, this is another example of uncertainty providing opportunity for successful investors.
  • The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve prescribing strong medicine in the form of higher interest rates, certain market sectors and the overall economy may have to endure some short-term side effects. Now that the Fed is ready to pivot, the markets are behaving as if we are in an economic recovery, which should mean leadership broadens out toward stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks.

Portfolio management

  • The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.

Please reach out to your Advisor if you have any questions.

About the author

Bob has over 30 years of investment experience. His primary areas of knowledge are in the design, implementation, and management of investment portfolios and providing investment advisory consulting services to company-sponsored qualified retirement plans. Prior to joining the firm, Bob worked at Blunt, Ellis, & Loewi, Charles Schwab Institutional, and Retirement and Estate Advisors.

Education: B.A in Business and Finance from the University of Wisconsin, Milwaukee.

Investment Advisory Services offered through Alera Investment Advisors, LLC. Securities offered through Triad Advisors, LLC., Member FINRA/SIPC. Triad Advisors LLC is separately owned and other entities and/or marketing names, products or services referenced here are independent of Triad Advisors.