Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial
As we enter the final month of the year, it looks like stocks may end 2023 on the same strong note as they started. However, 2023 was not without challenges.
As an eventful year for equities comes to an end, here are our reflections on the 2023 stock market:
1. High point: Stocks start the year with a bang
The S&P 500 Index posted its strongest January performance since 2019, while the tech-heavy NASDAQ Composite jumped out to its best start to the year since 2001. Falling inflation, contrarian stock positioning after a brutal 2022, soft landing hopes for the global economy and a low bar for the Q4 earnings season drove a generally positive trend across U.S. stocks during the first several weeks of 2023. Importantly, U.S. economic dynamics during the first few months of the year showed signs of firm but moderating conditions, which proved to be a consistent theme that helped support stocks and ease recession fears through most of 2023.
2. Low point: Bank failures cause short-lived fears among investors
The turmoil across regional banks in March set off a few alarm bells for investors as the first quarter ended. The quick successive collapse of Silicon Valley Bank and Signature Bank instilled fears that a Financial Crisis 2.0 was beginning to form. Aggressive Federal Reserve rate hikes over the last year had materially reduced the current value of banks’ Treasury/government bond holdings, which are used to reserve against bank deposits. While Silicon Valley Bank and Signature Bank ultimately failed, and a few others needed to be rescued, the Federal Reserve, FDIC and U.S. Treasury quickly acted to set up a backstop for depositors, allowing banks to park underwater securities with the Fed and draw funds to meet deposit/cash needs through a new lending facility. By the end of the quarter, contagion fears subsided. Although the regional banking stress weighed on sentiment and performance across Financials throughout the year, the broader stock market quickly discounted the stress and largely moved on from the events by April.
3. High point: Falling inflation and resilient economy reinforce investor optimism in first half
Stocks spent most of the first six months of the year marching higher and recovering from last year’s dismal performance. Through the first half of the year, stock prices responded well to falling inflation and resilient economic growth. However, investor enthusiasm over the outsized profit potential associated with artificial intelligence was the main driver behind powering a handful of mega-cap Technology stocks higher this year. This outsized performance across mega-cap Tech helped send the broader S&P 500 and NASDAQ higher as well, while other areas of the market largely languished for much of the year.
That said, moderating inflation, a resilient consumer, tight labor conditions, better-than-feared profit results in Q1 and Q2, stabilizing interest rates and a Fed close to moving to the sidelines after the most aggressive rate hiking campaign in decades had investors taking a more optimistic view of the economy and markets in the first half of the year.
4. Low point: Stocks face headwinds amid anxiety over recession prospects and interest rates
Following the S&P 500 hitting a 52-week high at the end of July, stock and bond prices spent most of the third quarter falling. During late summer and early fall, interest rates accelerated higher as the moderation in inflation slowed, a wave of Treasury supply hit the market and investors worried that the Fed would need to raise its fed funds target rate more than expected. At the same time, recession fears began to reemerge. With government bond yields approaching levels last seen since before the Financial Crisis, stocks fell in August and September, posting their first back-to-back monthly declines in a year.
Through the end of October, stubbornly tight monetary policy, higher energy prices and weakening consumer trends clouded the investment landscape. Sentiment had largely shifted from an optimistic tone at the start of the year to one much more concerned about fading growth and high interest rates. The resumption of student loan payments, a potential U.S. government shutdown (which was avoided), conflict in Ukraine and the Middle East and weaker-than-expected growth in China all contributed to pushing the S&P 500 to levels last seen in May by the end of October.
5. High point: Stocks race higher in November
Investors learned in November that consumer inflation fell more than expected in October and sat at levels not seen in more than a year. Also, the Federal Reserve decided to again hold its target rate steady at the start of the month. Investors interpreted the hold as adding further evidence that rate hikes were finally in the rearview mirror and policymakers are now more willing to let current policy rates bring down inflation with time. As a result, stocks rallied aggressively in November, closing out their best month of the year. The S&P 500 Index finished November up +9.1% on a total return basis, while the NASDAQ Composite gained +10.8%. Both major U.S. stock benchmarks notched their best month since July 2022. Whether across employment, consumer trends or inflation, the story is becoming clearer — the trend across each continues to paint a picture of moderation and a steady decline toward normalized levels. And that’s after the U.S. economy grew by a stunning +4.9% in the third quarter. In our view, current trends across the economy are exactly what policymakers and bullish investors want to see — if a soft landing remains in the cards — and why U.S. stock averages are on pace to record a solid year of gains heading into December.
And, of course, the year is not over yet …
Incoming data that reflects inflation unexpectedly breaking its downward-sloping trend or the U.S. economy slowing more severely than expected could quickly shift sentiment back to a pessimistic tone. This would likely weigh on stock prices for a period of time. Yet, trends across the economy and corporate profits have generally supported taking a more balanced view of macro conditions all year and one that has forced bearish investors to reassess their views. We believe the outlook for next year will largely depend on the path of inflation and interest rates, and given the trends seen in 2023, it remains prudent to maintain an investment view that isn’t overly bullish or bearish on next year.
Your financial advisor is here for you through the highs and lows
As you plan for year-end, consider working with your Ameriprise financial advisor to align your portfolios with your financial goals, risk tolerance and time horizon. Now is the time to look ahead to 2024 and review your strategy, especially if you have concerns about the future.