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The Good, the Bad and the Ugly (Weekly Insights 01/02/2024) Thumbnail

The Good, the Bad and the Ugly (Weekly Insights 01/02/2024)

Key Takeaways:

  • The good, the bad and the ugly for investors in 2023.
  • Surprising double digit gain in global equities.
  • Growth stocks roll over value investors.
  • Very concentrated equity rally.
  • Treasury bond Auctions disturbing.

As we officially put 2023 in the books, we would like to take the time to wish everyone a Happy New Year and hope for a happy, healthy and prosperous 2024. We offered an annual recap on the economy in our last weekly insights. Therefore, in this weekly, we wanted to highlight the good, the bad and the ugly that we saw in 2023 from an asset class perspective.    

The Good – Equity Rally: Investors may say the best part of 2023 was the unexpected double digit rally we saw in global equities. The MSCI AC World Index posted its best year in four years with every major region posting positive gains for the year.

The Good – 60/40 Split: After the worst year for a 60% stock (MSCI AC World Index)/40% bond (Bloomberg Aggregate) portfolio on record in 2022, investors enjoyed the rebound in 2023. A 60%/40% stock/bond portfolio recovered and delivered investors the best annual return since 2019.

The Good – Growth Roars Back: Growth stocks surged past value stocks in 2023 with the Russell 1000 Growth Index outperforming the Russell 1000 Value Index by over 31% for the year. This marks the second-best year for growth over value on record (behind 2019).    

The Good – Volatility Low: Despite the daily swings we saw throughout the year, volatility as measured by the VIX Index hit the lowest level since prior to the pandemic in December (12.07). For the year, the VIX Index dropped the most since 2019 (-42.6%).

The Good – Risk Rally in Fixed Income: Despite yields rising and bankruptcies jumping, corporate bonds were strong in 2023. Both high yield and investment grade bonds posted their best rally since 2019. In addition, the spread (the extra yield investors demand to own credit over Treasuries) fell to the lowest level seen since early 2022.

The Bad – Concentrated Rally in Equities: While equity investors welcomed the rebound in 2023, the large cap rally was highly concentrated. Within the S&P 500, the “magnificent 7” stocks (i.e., Amazon, Apple, Alphabet, Microsoft, Meta, NVIDIA, Tesla) made up ~60% of the total return for the year. In addition, the S&P 500 Market Cap Weighted Index outperformed the S&P 500 Equal Cap Weighted Index by the most since 1998 (outperformed by 12.4%).  

The Bad – Yields Break Long Term Trend: While long term Treasury yields (10YR) retreated from reaching the highest level since 2007 (hit 5% in Oct’23), they have officially broken above the long-term downtrend line we have seen since the 1980s.

The Bad – Dollar Loses Steam: After being the global currency leader, the dollar lost steam in 2023. The Dollar Index fell for the second time in the past six years in 2023.

The Ugly – Treasury Auctions: Treasuries saw substantial volatility in 2023. While the Fed’s aggressive tightening cycle contributed to the moves, the demand at Treasury auctions was unnerving. Especially since the Treasury needs to fund our burgeoning deficit.

The Ugly – Commodity Bear Market: As a consumer, lower commodity prices are welcome news. However, a commodity investor was forced to accept a difficult bear market in prices. The declines were led by energy, grains, and industrial metals.

The Ugly – Valuations Concerning: Valuations in large cap growth stocks relative to value stocks are historically high. When looking at the Russell 1000 growth price to earnings multiple (PE) relative to the Russell 1000 value PE, it is trading almost two times higher. This is like the dispersion before the dotcom bubble burst.    

Stay tuned for our 2024 market outlook in the coming weeks........

© 2023 Authored by Megan Horneman, Chief Investment Officer, Verdence Capital Advisors, LLC.   Reproduction without permission is not permitted. The indexes presented are unmanaged portfolios of specified securities and do not reflect any initial or ongoing expenses nor can it be invested in directly. An investment’s portfolio may differ significantly from the securities in the index.
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