The Fed finishes 2023 with a bang, plus 40 notable events that helped shape markets this year.
What a difference a year makes.
Stocks and bonds soared last week after the Federal Reserve signaled rate hikes are over and cuts are coming. Heading into this week, the S&P 500 is less than 2% away from its all-time high last seen in January 2022, and the rally is broadening out from just big tech. Ten-year Treasury yields closed back below 4% for the first time since July—declining more than 100 basis points from decade highs just two months ago.
This chart shows returns in 2022 and 2023 YTD, across asset classes.
For U.S. Equities, the 2022 return was -18.1%and the 2023 YTD return is 24.9%.
For World Equities, the 2022 return was -17.7%and the 2023 YTD return is 22.6%.
For Europe Equities, the 2022 return was -14.5% and the 2023 YTD return is 18.6%.
For 60/40 Portfolio, the 2022 return was -17.0%and the 2023 YTD return is 15.2%.
For U.S. High Yield, the 2022 return was -11.2%and the 2023 YTD return is 12.2%.
For USD Cash, the 2022 return was 1.5%and the 2023 YTD return is 4.9%.
For U.S. Agg. Bonds, the 2022 return was -13.0%and the 2023 YTD return is 4.9%.
For Commodities, the 2022 return was 16.1%and the 2023 YTD return is -7.9%.
This time last year, Chair Powell said the Fed would “stay the course” with rate hikes “until the job [was] done”. While inflation was slowing, it was still elevated, and the labor market was way out of balance. Amid what felt like a tremendous amount of uncertainty, a record number of CEOs said they expected a U.S. recession. Following that came bank stress, the debt ceiling and government shutdown drama, and geopolitical turmoil.
Today, inflation across the developed world has since more than halved, all while growth has remained resilient. That strong pace stands to fade, but the recession many of us fretted over never happened. This backdrop teed up the Fed to message a pivot in its final policy meeting of 2023. After holding rates steady last week (as expected), policymakers said they’re penciling in more rate cuts than anticipated—75 basis points in total next year, down to a policy rate of 4.6% (versus 5.1% the last time the Fed updated its projections). That’s still well above the roughly 3.8% that markets are calling for, but it’s a big decline that implies the Fed thinks it will cut rates three times next year.
This graph shows the Fed funds policy rate and the median FOMC dot projections since Jan 2021 as of December 14, 2023.
On January, 1, 2021 the Federal funds rate was 0.25%.
On January, 1, 2022 the Federal funds rate was 0.25%.
On January, 1, 2023 the Federal funds rate was 4.5%.
On December, 14, 2023 the Federal funds rate was 5.5%.
The December FOMC projection of the Federal Funds rate for 2024 was 5.4%.
The December FOMC projection of the Federal Funds rate for 2025 was 4.6%.
The December FOMC projection of the Federal Funds rate for 2026 was 3.6%.
The December FOMC projection of the Federal Funds rate for the longer term was 2.9%.
Central banks in Europe were more balanced, but the European Central Bank, Bank of England and Swiss National Bank each still suggested that they are done with rate hikes of their own. A clear global shift towards potential policy easing in 2024 seemed to pave the way for markets to rally.
Markets are moving quickly, but we don’t think you’ve “missed it”
Last week confirms the constructive view we laid out in our recently released Outlook 2024, After the Rate Reset: Investing Reconfigured, with the path forward potentially even better than we expected. As markets recalibrate, we think this environment offers attractive investment choices to consider today:
- Inflation will likely settle: Price pressures are abating across the developed world, and forecasts from central bankers show a durable path toward their 2% inflation targets.
- The cash conundrum: With the Fed (and other central banks) now on the verge of cutting (and potentially sooner rather than later), once-juicy yields on cash stand to fall—and fast.
- Bonds are more competitive: This also means that now looks like the time to consider locking in still-elevated bond yields. The opportunity cost against cash looks even greater after last week’s central bank meetings, especially if we end up seeing more cuts than we expect.
- Stocks will likely march to new highs: A U.S. soft landing—marked by moderate inflation, solid growth and easier policy—spells for a sweet spot for stocks. If the data continues to turn out even better than we expect, valuations could have some more room to expand, and earnings could even grow a bit above the trend-like pace we expect in our base case.
- Contained credit stress: Avoiding a recession means that credit stress should be more limited to areas such as commercial real estate and select pockets of corporate debt. Nimble, experienced active managers could take advantage.
One thing seems clear: the chase is on to add stocks and bonds in exchange for the record level of assets in money market funds. Markets are moving quickly, but there still may be more room to rally. The last time the Fed lowered interest rates pre-emptively (in 2019), the S&P 500 rallied about 30% and investment grade bonds returned nearly 9% that year. Looking at soft landings even more broadly, the S&P 500 typically rallies by roughly 15% on average in the 12 months after the first cut (going back to 1965).
This chart shows S&P 500 performance during Fed cutting cycles since 1965.
For the total average, the -12 months from first cut was 3.0%, the -6 months from first cut was -0.1%, 0 months from first cut was at 0%, 6 months after the cut was 3.4%, and 12 months after the first cut was 4.9%.
For Soft landing average, the -12 months from first cut was 4.1%, the -6 months from first cut was 2.7%, 0 months from first cut was at 0%, 6 months after the cut was 14.0%, and 12 months after the first cut was 15.3%.
For Recession average, the -12 months from first cut was 2.2%, the -6 months from first cut was -2.2%, 0 months from first cut was at 0%, 6 months after the cut was -4.2%, and 12 months after the first cut was -2.6%.
A final farewell to 2023
So as we conclude in our last note of the year, below we share a brief look back on the year that was: the bright spots and the challenges. So long 2023. We will see you in 2024!
This is the full time report: key events from 2023 in two charts. The first shows the MSCI World index level from January 2023 to December 2023, with annotated events along the way (that slot into Economy, Politics & Geopolitics, Nature, Culture & Technology, and Markets). It around the 2600 level before rising to 2850 by the start of February and pulling back again close to 2600 by mid-March. From there, the market goes on a sustained rally to levels close to 3100 by the end of July. The market then pulls back sharply over the next couple of months to 2700 in late October before rising sharply to end the year at year-to-date highs above 3100.
The second has the same annotations and shows the 10-year Treasury yield and 10-year German Bund yield. The 10-year Treasury line starts around 3.9% and fluctuates between 3.5% and 4% for a number of months before pushing higher from lows around 3.3% in April. Over the next six months, Treasury yields climbed more than 150bps to reach highs of close to 5% in October before falling sharply to end the year around 3.9% where they started. German Bund yields begun around 2.5% and stayed close to those levels for much of the first half of the year before grinding higher to a series high of 3% in October. Since then, yields have fallen to today’s level around 2%.
1 China ends its Zero-COVID policy 2 The U.S. government hits its legal $31.4 trillion debt limit 3 “Balloon-gate” 4 Kansas City Chiefs win the Superbowl 5 Silvergate Bank voluntarily liquidates 6 Silicon Valley Bank fails and U.S. banks post their worst daily performance since 2020 7 Xi Jinping re-elected as President of China for an unprecedented third term 8 OpenAI launches GPT-4 9 Taylor Swift kicks off her record-breaking Eras Tour 10 UBS buys Credit Suisse in a government-backed deal 11 LVMH becomes first European company to reach $500 billion market value 12 JPMorgan Chase takes over First Republic 13 WHO ends COVID-19 declaration of a global health emergency 14 Coronation of Charles III and his wife, Camilla, as King and Queen of the United Kingdom 15 Nvidia blockbuster earnings report kicks of AI hype in earnest 16 U.S. government suspends the debt ceiling 17 New York City covered in orange smoke from Canada wildfires 18 S&P 500 marks 20% rally from its October 2022 lows 19 The Federal Reserve “pauses” its most aggressive rate hikes in decades 20 Titan submersible implosion 21 Hottest global temperature ever recorded 22 The widely anticipated "Barbenheimer" weekend kicks off 23 The Federal Reserve hikes interest rates for the final time in 2023 24 Fitch downgrades credit rating for the U.S. government from AAA to AA+ 25 Wildfires ignite on the Hawaiian island of Maui 26 U.S. CPI inflation reaccelerates for the first time in over a year 27 Chip designer Arm's IPO soared nearly 25% in market debut - marking the largest IPO of the year 28 The European Central Bank delivers a surprise 25bps hike - its final rate increase of the year 29 Brent crude oil prices rally almost 20% in a month to peak at $97/bbl 30 McCarthy ousted as House speaker amid government budget and shutdown debate 31 Start of Israel-Hamas conflict 32 10-year U.S. Treasury yield hits 5% in intraday trading for the first time since 2007 33 FTX founder Sam Bankman-Fried convicted of one of largest financial frauds on record 34 Eli Lilly weight loss drop obtains approval in the U.S. and UK 35 The Magnificent Seven stocks add more than $200bn of market value in a single day 36 U.S. aggregate bonds post their best monthly return since 1985 37 Gold closes at an all-time high 38 JPMorgan Private Bank releases its Outlook titled "After the Rate Reset: Investing Reconfigured" 39 COP28 climate talks end with a call to transition away from fossil fuels 40 The Federal Reserve signals rate hikes are over and cuts are on the cards
This table shows the 40 events that occurred between January 2023 and December 2023.
1 China ends its Zero-COVID policy 2 The U.S. government hits its legal $31.4 trillion debt limit 3 “Balloon-gate” 4 Kansas City Chiefs win the Superbowl 5 Silvergate Bank voluntarily liquidates 6 Silicon Valley Bank fails and U.S. banks post their worst daily performance since 2020 7 Xi Jinping re-elected as President of China for an unprecedented third term 8 OpenAI launches GPT-4 9 Taylor Swift kicks off her record-breaking Eras Tour 10 UBS buys Credit Suisse in a government-backed deal 11 LVMH becomes first European company to reach $500 billion market value 12 JPMorgan Chase takes over First Republic 13 WHO ends COVID-19 declaration of a global health emergency 14 Coronation of Charles III and his wife, Camilla, as King and Queen of the United Kingdom 15 Nvidia blockbuster earnings report kicks of AI hype in earnest 16 U.S. government suspends the debt ceiling 17 New York City covered in orange smoke from Canada wildfires 18 S&P 500 marks 20% rally from its October 2022 lows 19 The Federal Reserve “pauses” its most aggressive rate hikes in decades 20 Titan submersible implosion 21 Hottest global temperature ever recorded 22 The widely anticipated "Barbenheimer" weekend kicks off 23 The Federal Reserve hikes interest rates for the final time in 2023 24 Fitch downgrades credit rating for the U.S. government from AAA to AA+ 25 Wildfires ignite on the Hawaiian island of Maui 26 U.S. CPI inflation reaccelerates for the first time in over a year 27 Chip designer Arm's IPO soared nearly 25% in market debut - marking the largest IPO of the year 28 The European Central Bank delivers a surprise 25bps hike - its final rate increase of the year 29 Brent crude oil prices rally almost 20% in a month to peak at $97/bbl 30 McCarthy ousted as House speaker amid government budget and shutdown debate 31 Start of Israel-Hamas conflict 32 10-year U.S. Treasury yield hits 5% in intraday trading for the first time since 2007 33 FTX founder Sam Bankman-Fried convicted of one of largest financial frauds on record 34 Eli Lilly weight loss drop obtains approval in the U.S. and UK 35 The Magnificent Seven stocks add more than $200bn of market value in a single day 36 U.S. aggregate bonds post their best monthly return since 1985 37 Gold closes at an all-time high 38 JPMorgan Private Bank releases its Outlook titled "After the Rate Reset: Investing Reconfigured" 39 COP28 climate talks end with a call to transition away from fossil fuels 40 The Federal Reserve signals rate hikes are over and cuts are on the cards
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All market and economic data as of December 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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