Happy Holidays-What a Year! (Weekly Insights 12/18/23)
Key Takeaways:
- U.S. economy remained resilient despite stubborn inflationary pressures.
- Cracks may be starting to show in the labor market.
- Global equities surge on a growth/AI related frenzy.
- Treasury yields climb to multi-decade highs but on pace to end the year flat.
- Commodities broadly lower; crude oil in bear market territory.
Year to Remember – 2023 Recap
This will be our last Weekly Insights for the year and we want to wish you and your families a happy holiday and healthy new year!
We wanted to use this weekly to recap what has been an impressive year from an economic and asset class perspective. Although, we admit the rally in global equities hides the challenges we have faced in 2023. We are reminded of the prolonged Russia/Ukraine war, a major banking crisis in 1Q23 and the most recent devestation taking place in Israel and the Gaza Strip. Our thoughts and prayers are with those impacted by these geopolitical events. Below are the key takeaways for the year.
Economy: At the start of 2023, economists placed a ~70% chance of a 2023 recession. The economy defied this negative view and is on pace to post 2.5% economic growth in 2023.
- Labor market: While recent cracks are emerging (e.g., job postings, uptick in unemployment rate), the economy added, on average, 230K jobs a month this year. In addition, the labor force participation rate rose to the highest level since February 2020.
- Easing inflation: Inflation as tracked by the headline Consumer Price Index cooled significantly over the year to 3.1% YoY (from 6.5% YoY in December 2022). Core PCE, the Fed’s preferred inflation gauge, is growing 3.5% (YoY) from 4.9% (Dec. 2022).
- Housing paralyzed: The 30YR mortgage rate hit the highest level since 2000 pushing demand for homes to a record low, according to pending home sales data.
- Consumers remained resilient: Retail sales data suggests consumers remained resilient. However, they are relying on credit cards at record high rates to fund spending.
Global Equities: Easing inflationary pressures and central banks likely finishing up their aggressive tightening cycles sent global equities higher in 2023. As of December 15th, the MSCI AC World Index is on pace to post its 7th best year on record (+21.3% YTD).
- AI craze: An AI related rally helped the Nasdaq lead U.S. equities. The index is up more than 40% for the year (6th all-time best year).1
- Magnificent 7: Seven stocks made up more than 50% of the S&P 500 total return in 2023. As a result, the S&P 500 market cap weighted index is outperforming the equal weight index by the most since 1998.2
- US equities on pace to outperform global counterparts: The tech heavy S&P 500 is on pace to outperform the MSCI AC World Index for the sixth consecutive year this year.
Fixed Income: Despite jumping in early 4Q23, the 10YR Treasury yield is nearly back to the same level as the start of 2023. Dovish Fed rhetoric and economic concerns have pushed yields lower.
- Credit leads rally: All the major fixed income sectors are higher year to date led by investment grade, EM bonds and high yield credit.
- Duration leads performance: While long term bonds are gaining to end the year, the full calendar year still favors short term Treasuries over long term Treasuries.
Commodities: The Bloomberg Commodity Index is on pace to decline and post its worst year since 2018.
- Energy weakness: Economic growth fears are overshadowing geopolitical turmoil and oil is on pace to decline for the first time since 2020.
- Gold shines: Gold is the best performing commodity this year. Geopolitical turmoil, Fed uncertainty and inflation supported gold.