December continued the upward market momentum begun in November. Exuberance over the possibility of Fed rate cuts carried the catchup/Santa Claus rally trade through to year-end. Small-cap outperformed while the Magnificent 7 continued to trade higher. A remarkable year in the markets, with plenty of ups and downs, highlighted by the concentration of just a handful of names carrying the performance load.
Eight out of the eleven S&P 500 sectors were positive for 2023. Technology led the way at +57.8% and Utilities brought up the rear at -7.1%. Yields for Treasuries climbed higher for most of 2023, with the 10-Year reaching 4.9% in October and retreating into year-end at 3.9%.
S&P 500: Dec +4.42% 2023 +24.23%
DOW: Dec +4.84% 2023 +13.70%
NASDAQ: Dec +5.52% 2023 +43.42%
Russell 2000: Dec +12.05% 2023 +15.09%
Sector Performance 2023:
Communication Services +55.8%
Consumer Discretionary +42.4%
Consumer Staples +0.5%
Energy -1.3%
Financials +12.2%
Healthcare +2.1%
Industrials +18.1%
Technology +57.8%
Materials +12.6%
Real Estate +12.4%
Utilities -7.1%
Current Treasury Yields:
6 Month Bill 5.23%
2 Year Note 4.37%
5 Year Note 3.99%
10 Year Note 3.98%
30 Year Note 4.15%
The Economy and the Fed:
The December’s job report indicated that the unemployment rate remained steady at 3.7%. Employers added 216,000 jobs, which was above the 170,000 jobs estimate. The consumer is still strong (holiday spending rose 5%.) Home prices remain elevated and in tight supply, and the average 30-year mortgage is at 6.62%.
GDP hit an annual rate of 4.9% for Q3, a 4.2% increase. The Producer Price Index (PPI) fell 0.1% for December, increased 1% from last year and climbed 2.5% for 2023. The Consumer Price Index (CPI) rose 0.3% in December and increased 3.4% for the year, higher than Wall Street expectations. Though down from 2022 levels, it is still above the Fed’s 2% inflation target. This would make a rate cut in March suspect.
Looking Ahead:
FactSet forecasts 11.8% earnings per share growth for S&P 500 companies in 2024. This is higher than the 8.4% trailing 10-year average. The banks began the earnings releases last week. Both JPMorgan Chase and Bank of America reported profits that fell from last quarter mainly due to higher regulatory capital requirements from last Spring’s banking crisis. All banks have been traversing through a higher rate environment and rising loan losses.
The average estimates for the S&P 500 from the street are targeting 4,902 for end of 2024, a roughly 6.2% increase from end of 2023. The biggest headwinds to markets moving higher are the Russia/Ukraine war…U.S. foreign policy with China and China’s economic recovery…the Israel/Hamas conflict in Gaza…and possible supply chain constraints caused by the Iranian aggression in the Red Sea. The fact that it is an election year will add volatility to the markets.
We continue to keep cash levels elevated. Market contributors will continue to broaden out away from Technology (Tech will still contribute.) Financials and Healthcare should be bigger contributors to performance in 2024. Treasuries still have a place in portfolios. We remain optimistic for a positive 2024 and still believe rate cuts are possible in Q2.
