U.S. Markets
Stocks moved higher in the final three months of the year as bond yields trended lower in growing anticipation of a potential Fed easing.
For the three months ending on December 31, the Dow Jones Industrial Average gained 12.5% while the Standard & Poor’s 500 Index picked up more than 11%. The Nasdaq Composite, which led throughout 2023, led again, tacking on nearly 14%.1
A Shaky Start
As satisfying as the fourth quarter’s results were, the quarter began in a discouraging fashion.
Strong economic data released in October stoked investors’ fears that the Fed would be unable to ease its tight monetary policies, sending bond yields to heights not seen in more than a decade. Concerns over Treasury funding and higher-than-expected consumer price inflation added to the gloom that gripped stocks during the first month of the fourth quarter.
November Turning Point
However, markets turned in November, rallying on fresh data that showed renewed inflation progress and constructive comments from Fed Chair Jerome Powell. These positive developments sparked a retreat in bond yields and the stock market began to move higher.
In a month’s time, pessimism over conditions potentially holding back the Fed from easing its restrictive policies faded, replaced by optimism that the rate hike cycle may be finished, and interest rate cuts may be in the offing in 2024.
Encouraging Earnings
Throughout the first two months, companies were reporting their third-quarter earnings. Coming into the quarter, investors had hoped that good earnings reports might serve as a catalyst to lift stocks from the sluggish previous months. Corporate earnings, it turns out, were not spectacular, but they offered signs of encouragement to investors.
For the third quarter, earnings grew 2.7% year-over-year, which was the second straight quarter of earnings growth—a welcome development after suffering an “earnings recession” (i.e., two consecutive quarters of earnings declines) before this. Wall Street analysts are forecasting an 11.8% increase in corporate profits in 2024, despite concerns about a potential recession in 2024.2
Powell’s Pivot
The momentum continued to build in December when the Federal Open Market Committee (FOMC) announced that it was leaving interest rates unchanged, and a survey of its members indicated that up to three interest rate cuts would be possible sometime in 2024. The announcement, coupled with dovish post-meeting comments from Powell, helped drive bond yields sharply lower and stocks higher.
What Investors May Be Talking About in January
One of the catalysts of last year’s market rally was excitement about the rise of artificial intelligence and its effect on corporate earnings.
Though tech companies may be the first to benefit from AI adoption, the broader promise lies in what it can do for workers and non-tech companies. Like electricity and computers, AI is beneficial to more than just utility companies and computer manufacturers.
Investors may pay close attention to how non-technology companies invest in AI as 2024 progresses. Companies making commitments might signal to investors that they have potential productivity advances and future competitiveness. The risk for investors is that the hype races ahead of reality, and the enthusiasm fades.
We Are Here for You
At Patriot, we will continue to focus on what we can control – asset allocation, costs, and having a plan.
We consistently communicate the importance of diversification through low-cost index funds, reasonable withdrawal rates, and not trying to time the market. These three variables are critical in the success of one’s financial plan. If you want to review your allocation or your goals, we are a phone call or e-mail away.
- WSJ.com, December 31, 2023
- Advantage.Factset.com, December 8, 2023
- SectorSPDR.com, December 31, 2023
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