All’s well that ends well, and the fourth quarter of 2023 capped a surprisingly good year for risk assets. A perfect recipe of declining inflation, better economic growth, and a Fed pivot away from interest rate increases propelled capital markets during the final three months of the year. Equities, both in the U.S. and internationally, advanced more than 10%. Fixed income gained a healthy 7% and gold hit an all-time high.

The fourth-quarter performance helped solidify full-year gains across most asset classes and geographies. On the back of an especially resilient economy and a much-feared recession that never materialized, U.S. equities increased 26% in 2023 and recaptured all of last year’s decline. International equities followed suit, gaining 18% in developed markets despite increased geopolitical tensions. Fixed income avoided an unprecedented third consecutive annual loss, advancing 6%. Overall, we are pleased with portfolio performance for 2023; it’s a welcome bounce-back from the challenging environment in 2022.

Index   YTD 2023 Q4 2023
S&P 500 U.S. Large Cap 26.2% 11.7%
Russell 2000 U.S. Small Cap 16.9 14.0
MSCI EAFE Developed International 18.2 10.4
MSCI EM Emerging Markets 9.8 7.8
Bloomberg Barclays U.S. Core Bond 5.5 6.8

Source: Factset

The strong performance of capital markets around the globe in 2023 may be confounding to some. Most forecasts at the start of the year called for a lackluster environment at best, as we were facing high inflation and elevated interest rates. Along the way, we encountered more than a few potential pitfalls to add to the uncertainty. The continuing war in Ukraine, the regional bank crisis in the spring, U.S. government debt ceiling worries in June, and the onset of the Israel–Hamas conflict in the fall all could have derailed the progress of the markets during the year. Yet through it all, capital markets and in particular equity markets were able to largely shrug off these concerns and march higher.

So, what drove the strength? The short answer is better-than-expected economic growth coupled with declining inflation. Consumer spending—roughly two-thirds of GDP—continued to drive the economic bus to the surprise of many. Fully employed but unphased by higher prices, the U.S. consumer increased spending in 9 of the 12 months (on an inflation-adjusted basis) in 2023. The resulting impact was U.S. GDP growth that will land somewhere between 2.25% and 2.75% for the full year. The much-anticipated recession (a contraction in GDP) never materialized, and that provided support for higher asset prices.

Coincidentally, inflation continued to retreat. The Consumer Price Index (a benchmark inflation figure) began the year at 6.4% and ended at 3.2%. Gas prices declined, mortgage rates fell, and goods inflation was essentially zero. Even food inflation moderated. Overall, improvement was better than expected, and while further progress needs to be made to reach the Fed’s stated 2% inflation target, it was sufficient to allow the Fed to pause hiking interest rates by midyear. With inflation expected to fall further, the need for higher interest rates disappears and interest rate cuts become more likely. Lower interest rates reduce the cost of capital and increase valuations. As a result, the prospects of such spurred both equity and bond returns, especially later in the year.

While the U.S. equity indices advanced nicely, the market averages were principally driven by the aptly named “Magnificent Seven”—Alphabet (aka Google), Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla). Collectively, these companies account for 28% of the S&P 500, rose 87% on the year, and accounted for an astounding two-thirds of the overall S&P 500 market return on the year. Share prices were fueled in part by exceptional corporate profit growth (about 40%) and the potential promises of artificial intelligence. Conversely, the remaining 493 stocks were up just 14%. Corporate profit growth for this group was markedly different, down 2.6% in 2023. This performance gap was the widest on record since 1998 and the dot-com craze.

After such an unpredictable year in 2023, opining on how 2024 will unfold seems like a futile exercise. As we begin 2024, sentiment is decidedly more optimistic than a year ago. Economic resilience and the prospect for lower rates are helping boost the conditions for an economic soft landing (where inflation reverts back to the 2% target, growth slows, but we do not enter a recession). A soft landing is probably a best-case outcome. The combination of continued growth and lower costs (as inflation subsides) would likely allow for corporations to expand profits and help drive further market gains.

Market dynamics also give us hope for continued momentum. The year following a peak in interest rates is typically good for both stocks and bonds. In the last eight rate hike cycles by the Federal Reserve (dating to the 1970s), forward-12-month returns for the S&P 500 were positive in seven of those instances and averaged over 12%. Bond returns were 7%.

Despite the positive inertia, there are many crosscurrents that could create turbulence during the year. We enter the year with two geopolitical conflicts raging and escalating tensions between China and Taiwan. We are also aware that monetary policy acts with lags, and it is still too early to definitively conclude that the impact of higher interest rates and a subsequent recession have been completely bypassed. Lastly, we are in an election year, and that will likely bring with it its own set of challenges and increased volatility. It is interesting to note that since 1928, the S&P 500 has advanced in 20 of the 24 presidential election years. Since 1952, the S&P 500 has never declined in a presidential election year in which the incumbent was running for re-election (like this year). Sitting presidents generally use all means available to stimulate the economy and provide a positive economic backdrop come election day. We suspect this year will be no different.

Whatever transpires in 2024, there are sure to be plenty of surprises along the way. If this past year reinforced anything, it reminded us that staying the course and being invested is critical to achieving long-term financial success. We certainly would not have predicted the year we had, but are happy that we stuck to our knitting and did not waiver from our long-standing investment approach and philosophy. We will do the same in 2024 and beyond.

We would like to express our gratitude for your continued trust and support. As we embark on yet another new year, we look forward to continued collaboration and prosperity for you, our clients. May 2024 bring health, happiness, and success in all your endeavors.

Please reach out with any questions or comments. We would love to hear from you.


John, Cam, Lauren, and team