Q4 Reflections: Easing Financial Conditions, Key Lessons from 2023, and What Investors Can Do in 2024

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Please note the publish date of this blog. Financial information, market conditions, and other data mentioned in this post may no longer be accurate or relevant.

Fourth Quarter Market Review

In the last quarter of 2023, there was a notable easing of financial conditions. The Federal Reserve, acknowledging in October that the proceeding months had witnessed a tightening of financial conditions, indicated a dampened need for additional rate increases. This sentiment was reinforced by the Fed’s decision to hold interest rates steady throughout the quarter. By December, policymakers were projecting three rate cuts in 2024, signaling a supportive monetary policy environment.

Against this backdrop, the disinflation trend gained further momentum, as shown in Exhibit 1 below. Core PCE inflation for November came in at 1.9% on a six-month annualized basis, marking the first time in over three years that the measure had fallen below the Fed’s target. This development underscored the growing evidence of moderating inflation pressures.

Graph showing inflation rate during the 2023 year.

Data from 12/1/2022-11/30/2023. Source: Bureau of Economic Analysis from FRED.

Meanwhile, consumers demonstrated remarkable resilience, with positive retail sales figures and sustained consumer confidence. Corporate earnings reports over the past several months were also generally robust, highlighting the continued strength of the US economy.

Aligned with the strong economic backdrop, the fourth quarter presented a favorable environment for investors, with positive returns for the quarter across stocks, bonds and real estate, as seen in Exhibit 2.

Fourth quarter stock market performance

Source: MSCI

Reflections on 2023

While the overall sentiment in the fourth quarter of the year was positive, there’s more nuance to  dig into when looking back at the entire year.

You may recall, early in 2023, many experts predicted a recession in the new year, citing factors such as high interest rates, consumer uncertainty, and geopolitical tensions. Despite these gloomy forecasts, markets had a pretty good year! The Federal Reserve raised interest rates several times, but at a more gradual pace than previously anticipated. This helped to ease inflation concerns and bolster investor confidence, as was evidenced in the aforementioned fourth quarter.

A standout performer in the market was the artificial intelligence (AI) industry, exemplified by notable gains in stocks such as NVIDIA, which soared by over 230%. The enthusiasm was fueled by increasing interest and excitement in chatbots and other language models. However, with great power comes great responsibility – and this growth sparked discussion and calls about the need for stricter regulations and ethical considerations surrounding AI use. We covered our take on AI and how it affects your investment portfolio in detail in our Q3 Reflections update.

We saw continued criticism around values-aligned or ESG (Environmental, Social, and Governance) investing, including greenwashing, lack of transparency, conflicts of interest, performance trade-offs, and political polarization.  These controversies highlight the complexities and challenges associated with ESG investing, and why it’s important to have a trusted advisor to help you navigate creating a portfolio that truly aligns with your financial goals and societal values. Exhibit 3 below demonstrates that it is possible to integrate values without sacrificing returns.

Graph showing ESG and performance for the ACWI ESG leaders vs. ACWI Standard over the course of time.

Source: MSCI

In March, we witnessed a minor banking crisis that caused a ripple of jitters in the market. Banks like Silicon Valley Bank, Signature Bank, and First Republic Bank encountered challenges, and ultimately failed, due to issues with their balance sheets in the face of the Fed’s efforts to curb inflation. However, the government stepped in to guarantee uninsured deposits, and the situation resolved itself without any major fallout.

Persistent geopolitical issues, such as the enduring conflicts in Ukraine, the Middle East, and the heightened tensions between the US and China, consistently garnered attention in the headlines. Nevertheless, in the face of these global concerns and distressing events, the market exhibited resilience.

Despite the myriad of headlines and events, along with notable market volatility, 2023 ultimately proved to be a good year for investors across different parts of the market as shown in Exhibit 4 below.

Chart showing 2023 annual stock performance

Date as of 12/31/2023. Performance in USD. Periods greater than one year have no guarantee of future results. Source: Dimensional Fund Advisors

Investors who stayed invested and committed through the challenges in 2022 and didn’t let fluctuating headlines and volatility throughout 2023 sway their investment plan were duly rewarded. We see this displayed in Exhibit 5.

Chart showing market trends in 2023 compared to 2022

Source: Bloomberg Finance L.P. Data as of December 14, 2023 Note: U.S. Equities represented by S&P 500 Index, World Equities by MSCI World Index, 60/40 MSCI World and 40$ Global Aggregate Bond Index (both in USD terms), U.S. High Yield by Bloomberg U.S. High Yield Corporate Index, USD Cash by Bloomberg U.S. Treasury Bills (1-3M), U.S. Agg. Bonds by Bloomberg U.S. Aggregate Index, and Commodities by Bloomberg Commodity Index. Past Performance is no guarantee of future results. It is not possible to invest directly in an index.

Looking Ahead to 2024

As we kick off 2024, it’s important to remember that predicting the future is never easy, especially when it comes to financial markets. Last year was a perfect example of this – who could have predicted the unexpected twists and turns we saw in the markets?

Despite the uncertainty, economists and investors love to make predictions and there are diverse opinions abound. And why not? It’s always exciting to try and guess what might happen next. As we start the new year, there are plenty of mixed predictions floating around. Some experts think interest rates will stay higher this year, while others believe they’ll come back down significantly through the course of the year. Some expect Big Tech to keep booming, while others predict a correction. And let’s not forget about global events and the 2024 Presidential election in the U.S. – those typically introduce an additional layer of complexity.

So, what’s an investor like you to do? Well, the first step is to take a deep breath and relax. Remember, no one has a crystal ball that can accurately predict the future. Instead, it’s important to focus on your long-term goals and risk tolerance. Stick to your strategy and try not to get too caught up in the day-to-day market fluctuations. And if you’re feeling uncertain or anxious, don’t hesitate to reach out to a trusted financial advisor for support.

Ultimately, the key to success in investing is to stay disciplined and patient. Easy, right? Okay, maybe not always easy, but definitely worth it in the long run.

Happy New Year, and here’s to a successful 2024!

 


Disclosure:

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Abacus account holdings correspond directly to any comparative indices or categories.

Please Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Abacus accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Please Also Note: This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.

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