US Markets
Stocks moved higher in the final three months of the year as bond yields trended lower in growing anticipation of a potential Fed easing.
For the three months ending on December 31, the Dow Jones Industrial Average gained 12.5 percent while the Standard & Poor’s 500 Index picked up more than 11 percent. The Nasdaq Composite, which led throughout 2023, led again, tacking on nearly 14 percent.1
A shaky start
As satisfying as the fourth quarter’s results were, the quarter began in an unpromising fashion.
Strong economic data released in October stoked investors’ fears that the Fed would be unable to ease its tight monetary policies, sending bond yields to heights not seen in more than a decade. Concerns over Treasury funding and higher-than-expected consumer price inflation added to the gloom that gripped stocks during the first month of the fourth quarter.
November Turning Point
But markets turned in November, rallying on fresh data that showed renewed inflation progress and constructive comments from Fed Chair Jerome Powell. These positive developments sparked a retreat in bond yields and a celebration in the stock market.
In a month’s time, pessimism over conditions potentially holding back the Fed from easing its restrictive policies faded, replaced by optimism that the rate hike cycle may be finished and interest rate cuts may be in the offing in 2024.
Encouraging Earnings
Throughout the first two months, companies were reporting their third-quarter earnings. Coming into the quarter, investors had hoped that good earnings reports might serve as a catalyst to lift stocks from the doldrums of the previous months. Corporate earnings, it turns out, were not spectacular, but they offered signs of encouragement to investors
For the third quarter, earnings grew 2.7 percent year-over-year, which was the second straight quarter of earnings growth—a welcome development after suffering an “earnings recession” (i.e., two consecutive quarters of earnings declines) previous to this. Wall Street analysts are forecasting an 11.8 percent increase in corporate profits in 2024, despite concerns about a potential recession in 2024.2
Powell’s Pivot
The momentum continued to build in December when the Federal Open Market Committee (FOMC) announced that it was leaving interest rates unchanged, and a survey of its members indicated that up to three interest rate cuts would be possible sometime in 2024. The announcement, coupled with dovish post-meeting comments from Powell, helped drive bond yields sharply lower and stocks higher.
What Investor’s May Be Talking About in January
One of the catalysts of last year’s market rally was excitement about the rise of artificial intelligence and its possible image on corporate earnings.
Though tech companies may be the first to benefit from AI adoption, the broader promise lies in what it can do for workers and non-tech companies.
Much like electricity and computers, AI is beneficial to more than just utility companies and computer manufacturers.
Investors may pay close attention to how non-technology companies invest in AI as 2024 progresses.
Companies making commitments might signal to investors that they have potential productivity advances and future competitiveness. The risk for investors is that the hype races ahead of the reality, and the enthusiasm fades.
World Markets
The MSCI-EAFE gained 10.10% in the fourth quarter thanks to falling inflation, lower yields, and a weakening U.S. dollar.4
Sharp declines in European inflation fed optimism of rate cuts, sending European stocks higher for the quarter, with advances in France (+5.61%), Germany (+8.87%), Italy (+7.47%), and Spain (+7.15%). The U.K., which lagged for most of the year, gained 1.65%.5
Pacific Rim markets were mostly higher for Q4. Australia picked up 7.69%, while Japan added 5.04%. The Hang Seng Index trailed with a drop of 4.28%, owing to Moody’s downgrade of China’s debt and new government restrictions on gaming.6
The Fed
The FOMC elected to leave interest rates unchanged at both its October/November and December meetings.
Following its December meeting, the Fed signaled that it may cut interest rates three times in 2024.
While careful not to declare a victory in its inflation battle, the Fed acknowledged that inflationary pressures have eased.16
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1. WSJ.com, December 31, 2023
2. Advantage.Factset.com, December 8, 2023
3. SectorSPDR.com, December 31, 2023
4. MSCI.com, December 31, 2023
5. MSCI.com, December 31, 2023
6. MSCI.com, December 31, 2023
7. BEA.gov, December 21, 2023
8. CNBC.com, December 12, 2023
9. WSJ.com, December 14, 2023
10. FederalReserve.gov, December 15, 2023
11. MarketWatch.com, December 19, 2023
12. Realtor.com, December 20, 2023
13. Census.gov, December 22, 2023
14. CNBC.com, December 12, 2023
15. Morningstar.com, December 22, 2023
16. WSJ.com, December 13, 2023
17. USNews.com, September 12, 2023
18. Consumeraffairs.com. April 20, 2023
19. Secloc.org, May 16, 2023
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