December 2023 Market Commentary & Outlook

December was a great month for the markets, building on the gains of the previous month and capping off a successful year. The current market narrative of declining inflation, easing interest rates, and better earnings ahead continued to fuel stock market gains, with smaller cap stocks and the energy sector, leading the way. The Russell 3000 gained 5.3% for the month, increasing 12% for the quarter and 26% for 2023. Meanwhile, foreign stocks also performed well, with the FTSE All World ex-US index rising over 16% in 2023. Fixed income joined the rally, with the Barclays Intermediate Gov/Credit index rising by 2.3% in December and 5.2% for 2023.

The main force driving performance in December and throughout 2023 was the Federal Reserve’s actions in combatting inflation. In December the combination of the Fed signaling three rate cuts in 2024 and dovish comments by Fed Chair Powell resonated positively across both equity and fixed-income markets. Yields decreased notably as the market swiftly factored in anticipated rate cuts, possibly as early as March 2024. These declining yields fueled an impressive equity rally in December.

December mirrored the trend of 2023, where equity markets responded positively to declining interest rates. The month began on a high note as yields continued their descent. However, a period of rising yields ensued, briefly pushing equity prices down, only to culminate in a strong finish by the month’s end. Similarly, 2023 commenced with a strong start, buoyed by declining yields and inflation, which propelled stock prices upward. Yet, the Fed’s shift towards a ‘higher for longer’ stance led to increased yields, tempering the exuberance in equity markets. Ultimately, yields descended towards the year’s end, propelling some equity indices to all-time highs, and fully reversing the setbacks experienced in 2022.

As we step into the new year, we anticipate corporate earnings, interest rates, and inflation will be the main market drivers in 2024.