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Investment Strategy

2023 in review: Rates, rallies and reflections

Dec 15, 2023

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 have soared this week after the Federal Reserve signaled rate hikes are over and cuts are coming. Heading into Friday, 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.

The market is signaling a paradigm shift

Today’s environment is very different from the one we started the year in. 

Then and now: Markets flex strength in 2023 – a reversal of 2022’s pain

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 Portfolio by 60% 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.
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 24.5%. For World Equities, the 2022 return was -17.7%, and the 2023 YTD return is 21.6%. For 60/40 Portfolio, the 2022 return was -17.0%, and the 2023 YTD return is 14.0%. For U.S. High Yield, the 2022 return was -11.2%, and the 2023 YTD return is 10.9%. 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 4.2%. For Global Agg. Bonds, the 2022 return was -16.2%, and the 2023 YTD return is 3.1%. For Commodities, the 2022 return was 16.1%, and the 2023 YTD return is -10.2%.

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 this 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.

The Fed is done hiking, and it looks like cuts are next

Sources:  Federal Reserve, Bloomberg Finance L.P. Data as of December 14, 2023.
This graph shows the fed funds policy rate and the median FOMC dot projections since January 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%.

Markets are moving quickly, but we don’t think you’ve “missed it”

This 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:

  1. Inflation will likely settle: Price pressures are abating, and the Fed’s own forecasts show a durable path toward its 2% inflation target.
  2. 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.
  3. 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 this week’s central bank meetings, especially if we end up seeing more cuts than we expect.
  4. Stocks will likely march to new highs: A 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.
  5. 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). 

What happens when the Fed cuts rates?

Source: Federal Reserve, NBER, Bloomberg Finance L.P. Analysis as of December 11, 2023. Analysis incorporates cutting cycles that began in: Nov '66, Aug '69, June '74, May '81, Oct '84, Jun '89, Jul '95, Sep '98, Jan '01, Sep '07, Jul '19, and Mar '20. Recession is determined by an NBER-defined contraction that occurred within 12 months of the first cut, excluding the 2019 cycle preceding the COVID-19 pandemic. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
This chart shows S&P 500 performance during Fed cutting cycles since 1965. For the total average, -12 months from first cut was 3.0%, -6 months from first cut was -0.1%, 0 months from first cut was 0%, 6 months after first cut was 3.4%, and 12 months after first cut was 4.9%. For soft landing average, -12 months from first cut was 4.1%, -6 months from first cut was 2.7%, 0 months from first cut was 0%, 6 months after first cut was 14.0%, and 12 months after first cut was 15.3%. For recession average, -12 months from first cut was 2.2%, -6 months from first cut was -2.2%, 0 months from first cut was 0%, 6 months after first cut was -4.2%, and 12 months after 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 lookback on the year that was: the bright spots and the challenges. So long 2023. We will see you in 2024!

2023: The year in review

Sources: Bloomberg Finance L.P., J.P. Morgan Wealth Management. Data as of December 14, 2023. Past performance is no guarantee of future results. It is not possible to invest in an index.
This is the full time report: key events from 2023 in two charts. The first shows the S&P 500 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 began just above 3800 and rose towards 4200 by the end of the month. It fell again to 4000 by early march. It fell to 3900 by mid March and then rose to 4100 by early April. It rose then to around 4200 by mid May 2022, and then rose again to around 4400 by late June. The second has the same annotations and shows the 2-year and 10-year Treasury yield from January 2023 to June 2023 with annotated events. The 2-year began at 4.4% and rose to 5.1% by early March, then fell to 3.7% and rose to 4.9% by the end of June 2023. Meanwhile, the 10-year began at 3.9% and rose to 4.1% by March 2023 and then fell to 3.8% by June 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 Era 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 U.S. May CPI report officially marks a halving in inflation 20 The Federal Reserve “pauses” its most aggressive rate hikes in decades 21 Titan submersible implosion 22 Hottest global temperature ever recorded 23 The widely anticipated "Barbenheimer" weekend kicks off 24 The Federal Reserve hikes interest rates for the final time in 2023 25 Fitch downgrades credit rating for the U.S. government from AAA to AA+ 26 Wildfires ignite on the Hawaiian island of Maui 27 U.S. CPI inflation reaccelerates for the first time in over a year 28 Chip designer Arm's IPO soared nearly 25% in market debut - marking the largest IPO 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 yields hits 5% in intraday trading for the first time since 2007 33 FTX founder Sam Bankman-Fried convicted of one of the 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 could be next.

Events

Sources: Bloomberg Finance L.P., J.P. Morgan Wealth Management. Data as of December 14, 2023.
This table shows the 40 events that occurred between January 2023 and June 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 off 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 U.S. May CPI report officially marks a halving in inflation 20 The Federal Reserve “pauses” its most aggressive rate hikes in decades 21 Titan submersible implosion 22 Hottest global temperature ever recorded 23 The widely anticipated “Barbenheimer” weekend kicks off 24 The Federal Reserve hikes interest rates for the final time in 2023 25 Fitch downgrades credit rating for the U.S. government from AAA to AA+ 26 Wildfires ignite on the Hawaiian island of Maui 27 U.S. CPI inflation reaccelerates for the first time in over a year 28 Chip designer Arm’s IPO soared nearly 25% in market debut—marking the largest IPO 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 drug obtains approval in the United States and United Kingdom 35 The Magnificent Seven stocks add more than $200 billion 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 J.P. Morgan 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 could be next
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In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A., a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.

With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction.

JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

  • May contain references to dollar amounts which are not Australian dollars;
  • May contain financial information which is not prepared in accordance with Australian law or practices;
  • May not address risks associated with investment in foreign currency denominated investments; and
  • Does not address Australian tax issues.

References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan team.

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JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states. Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.