From a financial and economic point of view, 2023 was memorable for defying expectations. When 2023 began, there were predictions of stubborn inflation, an economic recession and modest investment returns. Like most big picture predictions, these turned out to be well off the mark.
As 2023 ended, indications were that inflation was in a sustained retreat. The rate of inflation was halved in 2023 from approximately 6.5% in December 2022 to 3.1% in November 2023 as measured by the Consumer Price Index. For the 12 months ending November 30, the cost of shelter (home prices and rent) still rose 6.5% but the cost of food rose a more moderate 2.9%, while energy costs fell 5.4%.
Inflation’s decline has prompted what is being called the “Powell Pivot”. The Federal Reserve (the Fed) has held its Federal Funds interest rate steady since July and in his December press conference, Federal Reserve President Jerome Powell indicated that there was a distinct possibility the Fed would cut interest rates in 2024. Sensing change in the air, mortgage rates began declining in October. Lender Freddie Mac reported that the typical 30-year mortgage rate was 6.61% at the end of December, down over 1% from its October peak. The volume of home sales though, remains near a 22-year low due to very tight inventory.
Expectations that Fed was done raising interest rates and is considering cuts sparked a strong 4th quarter rally in the markets. The U.S. stock market finished the year with a gain of over 12% in the 4th quarter and a 26.9% gain for the year according to the Morningstar US Market Index. Growth stocks rebounded from 2022 to be up 39.5% in 2023 per the Morningstar US Growth Index. Value stocks were up 12.3% in 2023 as measured by the Morningstar US Value Index. Small cap stocks did equally well, up over 14% in the 4th quarter and 20.6% for 2023 per the Morningstar US Small Cap Index.
International stocks also rallied, up 11% for the quarter and over 18% for 2023 according to the Morningstar Global Index that excludes the U.S. The Chinese stock market was down over 10% in 2023 but overall, emerging market stocks still managed to be up 8.5% for the quarter and 11.7% for the year per the Morningstar Emerging Markets Index.
The 4th quarter rally in the bond markets ensured that bonds finished in positive territory. Overall, the U.S. bond market was up 6.5% in the 4th quarter, and 5.5% for the year per the Morningstar US Core Bond Index. U.S. corporate bonds were up nearly 8.5% for the quarter and 8.7% for the year according to the Morningstar Corporate Bond Index.
The U.S. economy managed to sidestep a recession in 2023 thanks largely to the great American consumer. While not as strong as 2022, 2023 retail sales grew from 2022 levels in 9 of 12 months according to the U.S. Census Bureau. Economists point to several factors for consumer’s continued strength. One is the “wealth effect” from the continued strong job market, rebounding stock market and rising home prices, that makes consumers feel more financially secure and comfortable continuing to spend. Another is the rise of the financially healthy “Senior Spender”. People over 65 now account for 17.7% of the U.S. population and an estimated 22% of consumer spending. That’s up from 13% of the population and 15% of consumer spending in 2010.
The Consumer Price Index measures the change in the cost of living by tracking the prices of a basket of consumer goods and services. The Fed Funds rate is an interest rate the Federal Reserve charges banks to borrow from it for very short periods of time.
The Morningstar U.S. Market Index measures performance of company stocks comprising 97% of the tradeable universe of stocks in the U.S. The Morningstar US Growth Index measures the performance of company stocks that meet the criteria for its growth segmentation. The Morningstar US Value Index measures the performance of company stocks that meet the criteria for its value segmentation. The Morningstar Small Cap Index measures the performance of small company stocks that fall between the 90th and 97th percentile in market capitalization. The Morningstar Global Markets – ex U.S. comprises developed and emerging market large cap stocks outside the U.S. The Morningstar Emerging Markets Index measures the performance of stocks in 24 emerging economies. The Morningstar U.S. Core Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term of approximately 5 years to maturity. The Morningstar US Corporate Bond Index measures the performance of fixed-rate, investment-grade, US-dollar denominated bonds with maturities greater than one year.
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.