Market Commentary January 2024

What a difference a year makes.  We’re not sure if we should title this commentary the 2023 year in review or the year of The Magnificent Seven.  Now we’re not talking about the classic 1960 movie The Magnificent Seven with Yul Brynner and Steve McQueen but rather the seven stocks that accounted for a disproportionately large percentage of the market’s performance in 2023.  These seven stocks had a little help from falling interest rates (after an October peak) and those two magic words, “Artificial Intelligence.”

We do not need to remind readers that as difficult as 2022 was with negative stock indices and historically poor bond returns that many investors threw in the towel only to miss the 2023 stock and bond rally.  It’s difficult to believe the Fed only started raising rates from zero a mere 22 months ago.  However, seven rate increases in 2022 and four more in 2023 have resulted in what the Fed considers a likely victory over inflation.  The perceived decrease in inflation has put the Fed on pause in respect to further rate increases and many advisors, investors and probable presidential candidates expect multiple rate cuts in 2024.  We are not so sure about rate cuts but more on this possibility later.

The Magnificent Seven stocks, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla carried the market in 2023 with every company appreciating more than 47%.   The S&P 500 was up 26.2% in 2023.  According to the S&P Dow Jones Indices if you remove the performance of the magnificent seven stocks from the index the calendar year return would have been just 9.9% or in other words seven stocks were responsible for 62% of the market return!

The fourth quarter market rally coincided with interest rates (10-year treasury) reaching a peak in mid-October near 5% and then proceeding to fall to 3.8% shortly before year end.  This decline in rates helped fuel a rally in small cap stocks.  While small cap stocks trailed their large-cap counterparts again in 2023 the small cap index was up 16.9% for the year with 14% of this return coming in the fourth quarter.  The multi-year swings in interest rate fluctuations reinforce the case that smaller companies are greatly impacted by rising and falling interest rates and to a much larger extent than large-cap companies.

Growth stocks outperformed value stocks in 2023. (see the Magnificent seven above) For the year the growth index was up 42% which compares quite favorably to the value index up only 11.4%.  It was tough even giving away dividend stocks when short term treasury bills are yielding 5.2%.  The foreign index was up 15.6% which is a good year but again trailed our domestic index and its’ AI fueled 26% return.   The “unstoppable” Chinese market was negative for the second year in a row due to a meddling communist party leadership that leaves investors with no confidence.  In addition, China has an over leveraged real estate market on their hands that could make our 2007-2008 financial crisis and subprime mortgage implosion mess look like tame in comparison.

Interest rates peaked in October followed by a sharp decline.  This decline in rates took the Bloomberg US Aggregate Bond index from a negative return through the year’s first three quarters to a 2023 calendar year return of just more than 5.5%.   Many investors took advantage of 5%+ money market and treasury bill rates to earn a meaningful low risk return on their savings.

The new year brings anticipation of interest rate cuts by the Fed and with it fuel for the stock market.  Our take on multiple rate cuts is much less optimistic and different than the group think on Wall Street.  Even with fewer rate cuts or none at all ahead of us in 2024 bonds are certainly more attractive than a year ago.  Further there are areas of the stock market not suffering from nosebleed valuations so investors must be judicious in their selection of equities.  Given the relative performance of growth stocks last year caution is warranted and a market consolidation tempering stock returns in the first half of 2024 a strong possibility.