Happy New Year!
We hope that everyone had a great holiday season and was able to enjoy time with family and friends.
The markets certainly enjoyed the holidays as well for most of the fourth quarter. During the quarter, domestic large cap stocks rose by +11.7%, domestic small cap stocks increased by +14.0%, international stocks were up +10.5% while the US bond market posted a +6.8% return for the quarter. The fourth quarter culminated an excellent year for stocks with domestic large cap stocks +26.3%, domestic small cap stocks +16.9%, international stocks +18.9% and bonds +5.5%.
There were numerous themes which contributed to 2023 returns but none was as influential to markets as the leadership of the top ten names within domestic large cap stocks. To give some context to that, the top ten names in the S&P 500 produced an average return of 62% in 2023. As a comparison, the other 490 names in the S&P 500 produced an average return of only 8%. Market leadership by so few names has become more notable in recent years as the concentration of the top 10 stocks has recently ballooned to 32% of the S&P 500 at the end of 2023. As a comparison, 25 years ago the top 10 names represented about 18% of the index. 2 This is a theme we will continue to watch as we transition into 2024 and would not be surprised to see market leadership rotate into stocks and sectors with stronger fundamentals with more attractive valuations than their 2023 counterparts.
If we pivot back to the quarterly totals, there were a variety of reasons both stocks and bonds produced such significant results during the fourth quarter. None was more important than easing CPI inflation which dropped to 3.2% on the November reading (down from 3.7% in October) and 3.1% on the December reading. As a result, the Federal Reserve was able to keep interest rates unchanged at their November and December meetings and signaled to markets that three rate cuts totaling 0.75% were expected in 2024.3 In addition, job growth continued to remain strong in the fourth quarter as the unemployment rate dropped to 3.7% while jobs added for the year increased to 2.7 million.
As we look ahead to 2024, we expect some “normalcy” to start to settle back into markets this year as inflation creeps closer towards the Federal Reserve’s 2.0% target, the US economy remains strong and resilient and market valuations start to trend towards long-term averages. While we undoubtedly will see pockets of volatility this year due to continued geopolitical issues, an unknown timeline for potential interest rate cuts by the Federal Reserve and the 2024 election, market volatility should begin to normalize given that we are past the pandemic and inflation issues which have fostered uncertainty for the past four years. It should also allow us to refocus our attention on clients’ long-term planning goals, the most important factor in portfolio construction.
As always, we appreciate your trust and confidence in all of us at MSA Financial. Should you have questions or would like to schedule time to review your portfolio or discuss the economic environment, do not hesitate to contact us.
MSA Advisor Team:
Paul Marino, CFP® Richard E. Stram, CFP®
Michael Cammarata, CFP® Robert P. Roy
Ryan A. Zimmerman CFP®, AIF® Brandon Roy, CFP®
1Market segment (index representation) as follows: Domestic Large Company Stocks (S&P 500), Domestic Small Company Stocks (Russell 2000) International Stocks (MSCI EAFE) and Domestic Bonds (Bloomberg Barclays US Aggregate Bond Index)
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