Market Insights Q4 2023
Everyone welcomes in the new year with a sense of excitement and optimism, ready for a fresh start and good times ahead. Heading into 2024 markets sure were optimistic about the outlook for the economy with one of the best “Santa Claus” rallies in recent memory, mainly due to increased investor optimism of a soft landing. The bond market is coming off monthly returns not seen in over 40 years as through the last two months of the year, the U.S. Treasury index is up 6.95%, the Bloomberg aggregate bond index is up 8.53% and broad municipals are up a staggering 8.82%, their best December in 20 years. Meanwhile in equities, the S&P 500 is up almost 14%, the Nasdaq has returned almost 17% and the Russell 2000 rallied over 22% the last two months of 2023. This recent stretch has undoubtedly provided returns that are usually seen in an entire year or longer. We believe at this point it may be important to temper expectations about what the market is able to accomplish as we embark on our 2024 journey.
Equity markets may find it difficult to mirror returns seen in 2023, especially the +13% seen over the last two months of the year. At elevated multiples, the track record for markets is much more “down to earth” than many of the multi-month moves we just witnessed. It is fair to say that the higher multiples become for stocks, the more limited potential upside is moving forward.
For fixed-income markets, after a strong year-end rally, many believe it is time for a breather. When looking at the treasury market there may be some clues with return assumptions in the year ahead. The inverted yield curve paints an interesting picture with the belly of the curve (5–7-year space) being the lowest yielding portion to be found. Taking on additional duration risk in this environment has become quite unattractive, as investors receive no additional yield compensation for a 7-year (3.99%) or 10-year (3.99%) bond than you would a 5-year (3.99%).
Throughout 2024 market performance could be negatively impacted by the ongoing battle with inflation and potentially a more “hawkish” Federal Reserve (Fed) throughout the year. Perhaps there could be a “delayed landing,” a scenario resulting in an extended fight for the Fed and the Fed Funds rate remaining in restrictive territory for longer than previously expected. This is another case that financial markets aren’t currently anticipating and may, if it comes to fruition, negatively impact performance. The Fed Funds futures market is pricing in Fed cuts in less than three months — a very rosy item on 2024’s New Year’s wish list. If that does occur, the risk of inflation surprises later this year only increases and may result in adversely affecting market returns down the road.