Looking in the rearview at 2023, the best sounding economic forecasts offered at the beginning of the year have mostly been left by the wayside after being found almost entirely inaccurate.  Prognostications from a year ago that seemed so sensible at the time have become equally as nonsensical with the passing of time. After a tumultuous 2022 in financial markets, many were calling for an imminent recession.

Source: Bloomberg

Despite many understandable calls for 2023 to be another rough year in financial markets, the US labor market and consumer spending strength in the US powered the equity markets to become another  iteration of a theme that has dominated for well over a decade now – US equity outperformance highlighted by blistering returns in large cap tech companies.  This year, much of the driving force was likely the splash that ChatGPT and other impressive leaps in the world of artificial intelligence.

ETFs Listed (dividends reinvested):

$QQQ – Nasdaq 100 (+54.9%)

$SPY – S&P 500  (+26.2%)

$VEU – FTSE All-World ex US Index (+15.8%)

$VWO – FTSE Emerging Markets All Cap (+9.3%)

$TLT – 20+ Years Bond (+2.8%)

$VGSH – U.S. Treasury 1-3 Year – Vanguard (+4.3%)

The commodity markets also led to outcomes that few could have foreseen. Despite the lingering war in Ukraine and flaring tensions in the Middle East, energy prices have been subdued, with liquified natural gas plummeting this past year.  Oil and base metals remained muted throughout most of the year.  Gold has continued chopping over the $2,000/oz level, with some investors choosing to hold it for inflation protection or as a geopolitical hedge, while others prefer the yield that cash provided throughout the year.  The big winner in the commodity space in 2023 was uranium, with tailwinds coming from energy transition goals coupled with formidable supply constraints relative to demand.

Editor’s note: The listed ticker symbols represent securities investing in or gaining exposure to specific commodities, but will not match perfectly with the record of the spot price of the underlying commodity.

ETFs Listed (in order of performance):

$U.U – Uranium (+82.1%)

$GLD – Gold Trust (+12.7%)

$SLV – Silver Trust (-1.1%)
$DBC – Commodities (various) (-6.2%)

$USO – Oil Index (-4.9%)  

$UNG – Natural Gas (-64.0%)

This push and pull between the Fed’s path relative to investors’ relative expectation led to some degree of volatility in parts of the US Treasuries yield curve, with the 10 year yield going on a roller coaster before ending at the same 3.8% yield it began the 2023 with.

Source: Bloomberg 

Many market participants will continue to listen closely to Federal Reserve’s posturing around possible interest rate cuts, with the market wrapping up 2023 pricing in more rate cuts than the Fed seemed to be signaling.  The Fed, not seeing labor market deterioration yet on its the path to its 2% interest target has reasons to remain hesitant about cutting rates as quickly as many would like.  

Source: Capital Economics cia Andrew Hunter (link: Yahoo Finance)

Much like 2023, 2024 will likely be unpredictable in its own unique ways.. With geopolitical tensions eliciting doomsday headlines, the mega cap tech stocks that have dominated much of the last decade once again ballooned US equity indexes further, effectively negating any bearish sentiment elicited by fears of disruption to the global order.  Their continued outperformance likewise papered over the fears of what “higher for longer” interest rates might mean for company balance sheets. But the astonishing lack of breadth of the market gains remains an elephant in the room for investors wondering how long so few companies can hold up the largest equity market in the world.  Geopolitics, the Federal Funds Rate, and the US stock market breadth could be three of the defining themes of 2024, along with all of the things that none of us see coming yet.

Source: Lord Abbott