Market Insights: Fourth Quarter 2023

Stocks and Bonds Finish Strong in 2023

What a difference a year makes.

At this time last year, the S&P 500 had just logged its worst annual performance since the financial crisis, the Fed was in the midst of the most aggressive rate hike campaign in decades, inflation was above 6%, and concerns about an imminent recession were pervasive across Wall Street. 

As it turned out, 2023 was a year of surprises for the markets as the expectations for a recession never materialized, inflation came down, corporate earnings proved resilient, and the Fed surprised markets by pivoting to a more dovish policy. 

As we begin 2024, the market outlook has turned materially positive. The Fed is likely done raising interest rates and rate cuts could be on the way, economic growth has proven unexpectedly strong, fears of a recession have receded, inflation has dropped dramatically, and corporate earnings growth is expected to continue.

Undoubtedly, that’s a more friendly environment for investors compared to the start of 2023. However, as we just learned from the overly pessimistic forecasts for 2023, markets do not always react as expected. Looking ahead to 2024, it's important for us to not become complacent because many positives in the new year are priced in to stocks and bonds at current levels.

Starting with Fed policy, Fed officials are currently forecasting three rate cuts in 2024 but markets are pricing in six cuts, the first occurring in March or May. That’s a very aggressive assumption and if it’s incorrect, we should expect an increase in volatility in both stocks and bonds.

Regarding economic growth, the economy was resilient in 2023, but that doesn’t mean it will stay that way. The longer rates stay high, the more of a drag they become on the economy. Meanwhile, the remnants of pandemic-era stimulus are gone and some economic data is starting to point towards reduced consumer spending. Point being, it is premature to believe the economy is “in the clear.” We will be watching closely to see if there is a meaningful growth slowdown.

Inflation has declined sharply, but still remains solidly above the Fed’s 2% target. Many investors expect continued slowing of inflation while economic growth remains stable, a concept Wall Street calls “Immaculate Disinflation.” While that’s possible, it’s extremely rare. Declines in inflation are usually accompanied by an economic slowdown.

Finally, corporate earnings have proven resilient but companies could face margin compression as inflation declines and if economic growth slows. Weaker-than-expected earnings would be another potential headwind on markets.

To wrap things up, while we are prepared for a positive outcome this year, we are focused on managing both risks and return potential. The past several years demonstrated that a well-planned, long-term focused investment plan can withstand market surprises and related volatility, including multi-decade highs in inflation, historic Fed rate hikes, and geopolitical unrest.

We thank you for your ongoing confidence and trust. Our team will remain dedicated to helping you successfully navigate this market environment.

Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.

The Primoris Wealth Advisors Team