Monthly Market Commentary – December, 2023
- A November to Remember. November saw a strong rally in equities, halting a three-month slide and marking one of the most robust monthly performances in recent memory. Investors have regained confidence in the US stock market, driven by several key factors: a drop in oil prices, lower inflation figures, and the Federal Reserve signaling the end of the rate hike cycle. Additionally, a retreat in long-term Treasury yields from their recent peaks, and a strong finish to third-quarter corporate earnings contributed to this strength. Concurrently, falling interest rates have provided a welcome boost for bond investors as well.
- US Treasury. The yield on the benchmark 10-year US Treasury note breached 5% for the first time in 16 years, but has since retreated sharply to 4.37% at month-end. This significant drop in long-term rates was likely due to a combination of slowing economic growth, combined with rising expectations that the Federal Reserve will ease monetary policy in the early months of 2024.
- Economy. The US economy remains resilient despite persistent fears throughout the year for a recession. However, emerging signs suggest the health of the economy is shifting from one of relative strength to “good”. The revised Q3 Gross Domestic Product (GDP) figures indicate annualized growth of 5.2%, an increase from Q2’s 2.1%. Nonetheless, some pockets of weakness are apparent, including the rate-sensitive housing sector. Similarly, the previously buoyant job market is beginning to show signs of cooling, even as the employment numbers still suggest a healthy labor market. This trend likely signifies a normalization phase, as we correct from multiple Covid-era anomalies, including stimulus-driven demand, excess savings, labor shortages, supply chain disruptions, and inflation.
- Federal Reserve. With inflation easing and the economy showing signs of softening, the Federal Reserve voted unanimously – for the third consecutive time – to keep the benchmark overnight borrowing rate unchanged at its 22-year high. To provide context, the Fed had implemented 11 rate increases since March 2022 to address high inflation, which has slowed markedly after hitting a four-decade high in the summer of 2022. Along with the decision to remain on hold, committee members indicated the possibility of at least three rate reductions in 2024.
- 2024 Market Outlook. We are moderately optimistic heading into 2024. Our sentiment stems not from an expectation of rate cuts by the Federal Reserve, but rather from the tough monetary policy that has already been implemented. US corporations have adapted to the environment of higher interest rates, strategically realigning their cost structure to prepare for the widely anticipated but yet to happen 2023 recession. Such a defensive posture will soften the impact on corporate earnings in the event of a significant economic slowdown in 2024. More recently, we are encouraged that the market rally has broadened to the rest of the market, and not confined to just the “Magnificent 7” stocks. In short, we think 2024 will likely deliver a backdrop of falling rates and improving earnings, notwithstanding potential modest growth in GDP, which provides a positive setup for risk assets.