Investors finished 2023 in a good mood.  Inflation is down, employment is up, and corporate earnings are expected to grow strongly next year for companies in the S&P 500 Index.  Concerns that seemed top of mind at the end of the third quarter, including a UAW strike, a possible government shutdown, and rising oil prices have faded into the background.  Meanwhile, optimism abounds that interest rates will start to decline in 2024.

The rapid shift in investor mood from dour at the end of the third quarter to euphoric at the end of the fourth quarter seems par for the course these days.  Ever since the Covid crash at the start of 2020, stock and bond markets have been more volatile.  To give one indication of this increased volatility, in the four years before Covid, the S&P 500 index either gained or lost more than 1% on only 39 days, on average, out of the 252 trading days in a year.  In the four years since Covid, the S&P 500 has gained or lost more than 1% on an average of 87 days per year – more than twice as often.

The economy seems to be in good shape as we enter 2024, with consistent GDP growth, strong consumer spending, and improving consumer sentiment.  However, the markets have largely already priced this in.  The S&P 500 is expensive compared to historic averages, with stocks trading at 26 times earnings as of the start of the year, which is quite a bit higher than the 50-year long term US average of approximately 20 times earnings.  As a result, it’s certainly possible that we could have a good year in the US economy, and yet have less stellar stock returns if results don’t exceed the currently high expectations.

International markets are still trading at much lower prices, with the MSCI All Country ex-US index trading at just 14 times the total earnings of the companies in the index.  With expectations lower for growth in much of the rest of the world, any upside surprise would likely positively impact international valuations.  Should US interest rates fall more quickly than expected, a declining dollar could also have a positive impact on the price of international stocks.


The Russell 1000 index of large US companies gained 12.0% in the fourth quarter of 2023, and 26.5% for the full year.  Technology was one of the strongest sectors for both the year and for the fourth quarter.  Nvidia, a high-end semiconductor maker that has benefitted from the artificial intelligence boom, gained 220% in 2023 (mostly in the first half of the year).  Other tech stocks like Meta Platforms (up 172%) reversed 2022 losses to rally in 2023.

Smaller companies outperformed their larger counterparts for the quarter, but still trail the biggest US stocks for the full year.  Small stocks tend to be more sensitive to rates and the US economy, and the Russell 2000 index jumped 14.0% in the fourth quarter on improving economic news, ending the year up 16.9%.  Small bank stocks led the small cap rally in the quarter, as the financial sector gained 21.6% in Q4.

International stock markets added 10.4% during the quarter, as measured by the MSCI EAFE index of developed country stocks in dollar terms.  This return was aided by a declining dollar, however, and in local currency terms, the developed country index was up just 5.0%.  For the year, international developed country stocks are up 18%.  Emerging markets did not do as well.  The MSCI Emerging Markets index was up 7.9% for the quarter, and just 9.8% for the year.  China’s disappointing returns were the main culprit.  Without China, the Emerging Markets index would have returned a respectable 20.0% for the year.


Trying to predict the next moves of the Federal Reserve captivated investors in 2023.  In the end, the last interest rate hike was in July, and the Fed has held short term rates steady since then.  The market has started to anticipate a reversal in the Federal Funds Rate for 2024, and long-term rates have started to fall as a result.

There have been few periods since 2000 that the Fed has had the luxury of a “normal” level of interest rates.  Should the economy slow, the Fed now has room to reduce rates from the current level of 5.25%-5.50% to provide the economy with a boost if needed.  For many periods, especially since 2008, rates were already so low that the Fed had to use other tools to encourage the economy along.  Having room to reduce rates will undoubtedly come in handy if and when the economy sees a slowdown.

The decline of long-term rates has helped bond prices to rebound, and the Bloomberg US Aggregate bond index picked up 6.8% in the fourth quarter as a result, moving it into positive return territory for the year, with a 2023 gain of 5.5%.  Meanwhile the Schwab US Aggregate Bond ETF is still paying an annualized SEC yield of 4.3%.

Currencies and Commodities

The US Dollar declined in the fourth quarter against a basket of foreign currencies (as measured by the US Dollar Index).  This has helped boost foreign stock returns and foreign (unhedged) bond returns.  It’s also helped boost the price of commodities like gold, which was up 11.0% for the quarter.

Meanwhile, the price of oil has declined, despite the ongoing war in the Middle East.  WTI Crude oil prices declined from $91 at the end of the third quarter to $72 by the end of the year.  We have seen this at the gas pump as well, as the average national price of a gallon of gas declined from $3.84 at the end of the third quarter to $3.09 at the end of the year.

Looking Ahead

As Niels Bohr, the Danish Physicist famously said, “It’s difficult to make predictions, especially about the future.”  That was certainly true this year.  A year ago, economists almost unanimously agreed a recession was imminent for 2023.  There was significant concern about rising rates crippling the economy.  Instead, the US experienced consistent, modest growth, quarter after quarter.  Higher rates slowed inflation, without killing the golden goose of economic growth. 

So where is inflation now?  It turns out there are many answers to this question.  The most common answers are 3.4% or 3.9%.  3.4% is the growth in CPI (Consumer Price Index) in 2023.  3.9% is the growth of “Core” CPI, which excludes the more volatile food and energy components from the index.  Both of these are still above the Fed’s target of 2%.

There is reason to believe, however, that inflation should further decline towards the Fed’s target in 2024. As we have discussed in prior commentaries, housing inflation (aka “shelter” inflation) is a significant component of both CPI (30%) and core CPI (40%) and the way shelter inflation is measured lags other components.  Shelter inflation has stayed high throughout 2023, and CPI excluding shelter was just 1.8% in 2023.  A decrease in housing inflation in 2024 would help get CPI and core CPI closer to 2%.

Therefore, inflation may not be the dominant factor in 2024 that it was in the past two years.  How quickly the Fed lowers rates will still be a big story, but there will likely be many other factors impacting returns.  Whether corporate earnings, especially tech earnings, meet expectations will be important.  In the US, we’ll be looking at when housing and manufacturing recover their lost steam.  Geopolitical events and the related price of oil, the US elections, and whether China’s economy revives are also likely to grab headlines.  Of course, there will be events that aren’t on our radar yet as well. 

A diversified portfolio will help investors cope with the broad range of factors likely to impact markets in 2024.  We will be paying attention to emerging risks as global economies move from the post-Covid markets of the past four years and enter a new phase.