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Coming into 2023 consensus projections saw a year of exceedingly weak growth amid tangible risks of a downturn. Federal Reserve members projected a recessionary increase in the unemployment rate and extremely low growth for 2023. Professional forecasters were not much more optimistic as they placed the chances of economic decline at some of the highest levels in years with 85% of economists forecasting a recession.
However, by the end of 2023 growth had instead meaningfully exceeded expectations, with GDP rising 2.3% through Q3 as the US added approximately 2.8 million jobs. Meanwhile, inflation has cooled to some of the lowest levels since the initial price surges of 2021, with core PCE inflation already coming in below the Fed’s late-2022 projections. In short, 2023 turned what was once a bleak outlook into a story of remarkable recovery and those trends continued on into Q4, finally boosting equity markets after a relatively lackluster first nine months for the average stock.
Global equity markets rallied close to historical highs as fears of a recession high inflation abated. The MSCI World Stock index ended the year up 21.77%, with gains largely on the back of the 7 stocks. Europe and Japan saw similar gains, with China’s Hang Seng (-13.8%) being a notable laggard as interest from international investors has dried up and the country’s real estate melt down escalated.
The US market’s gains were concentrated in a handful of large-cap companies, often referred to as the “Magnificent 7.” These are mainly large cap tech firms including Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla. Their success, in comparison to the broader economy, can be attributed to a concept called mean reversion.
Except for Nvidia and Microsoft, which benefited from the rapid adoption of AI, these companies had previously suffered disproportionately in 2022. Their recent gains were, in large part due to a reversal of the adverse economic conditions and poor sentiment that impacted them in the previous year.
In the fixed income markets, the Federal Reserve executed a notable pivot in December, transitioning from a perceived adversary to an ally as we approach the critical 2024 U.S. election year. During the December meeting, the Fed appeared to be leaning into additional interest rate cuts in the months ahead.
Notably, the Fed’s “dot plot” diverges significantly from market pricing. The Fed is projecting only three rate cuts of 0.25% each, compared to the approximately six cuts or 1.5% priced into the bond market at current levels. Acknowledging a deceleration in inflation, the Fed now expresses equal concern for economic growth and employment. Meanwhile, corporate credit spreads remain close to 5-year lows as measured by the US Corporate BAA-Treasury Spread index.
Although there appears to be no substantial weakening in the U.S. economy yet, Chairman Powell appears willing to support growth should the ongoing economic expansion face significant challenges.
Going forward, we see a year of higher volatility driven by elections in 40 different countries, multiple wars, rising trade tensions and a somewhat unpredictable Fed. Nevertheless, further gains are possible in both the equity and fixed income markets. In all likelihood, the major central banks are done with extreme tightening of monetary policy for this cycle and the U.S. economy appears to remain surprisingly resilient with ongoing employment growth. Despite an increase in market volatility, we expect to continue to find attractive investments on an issue specific basis.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
