December 2023 Market Review and a Look Ahead

Equity markets

Small capitalization stocks led in December 2023 (Russell 2000 +12.2 percent), narrowing the performance gap versus large cap stocks that marked most of 2023. The same was true of the style gap (Russell 1000 Value +5.5 percent for the month versus Russell 1000 Growth +4.4 percent), but growth still dominated for the year (Russell 1000 Growth 42.7 percent versus 11.5 percent for Russell 1000 Value). The returns for the S&P 500^® were dominated by the “Magnificent Seven” (Amazon, Apple, Google, Meta, Microsoft, NVIDIA, and Tesla, discussed in our August 31, 2023 article) whose contribution to the index return was by far the majority of the S&P 500^® return of 26.3 percent (see the graph below).

Non-U.S. stocks also had a good month (EAFE +5.3 percent, MSCI EM +3.9 percent), but lagged the U.S. again for the year. China was the worst-performing large country (-11 percent), dragging down the emerging markets index return given its large weighting in the index.

Fixed income markets

Interest rates continued to drop during December, albeit at a slower pace than in November. Overall, the Bloomberg Aggregate Index returned 3.8 percent for the month and 5.5 percent for the year. The best performance in the month was, again, from longer-duration bonds, with a return of 8.6 percent, and thanks to the returns in November and December, the year ended with a positive 3.1 percent return. High yield bonds and leveraged loans provided the best performance for the year in fixed income, returning 13.4 percent and 13.3 percent, respectively.

Interest rate volatility was the theme of 2023, with the 10-year Treasury beginning the year just below 3.9 percent, peaking just above 5 percent in October, and closing the year back where it started at 3.88 percent, as shown in the following graph. While rates are up dramatically since the end of 2021, we need to go back to 2007 to see yields near current levels. 

Looking ahead

Looking ahead, futures markets are pricing in six interest rate cuts in 2024, well ahead of the Federal Reserve’s projection of three. So, while the market and the Fed may be more in line than during most of 2023, it looks like the market may be ahead of itself. Even still, a reduction in interest rate volatility is expected to provide the long-awaited benefits of higher-yielding bonds.

As for equities, the “Magnificent Seven” may also be ahead of themselves, and there may be room for other segments of the equity market to provide solid returns if we get a continuation of the breadth we saw in November and December.

Our detailed outlook and review of 2023, including private markets, will be published in the weeks ahead.