Animal spirits were alive and well in the fourth quarter, driving the NASDAQ and Dow Jones indices to record highs while the S&P500 finished the year just shy of its own all-time high. The quarter-end rally was ignited by a late October announcement from the Treasury that it would largely fund the Federal debt in the short end of the market. The policy shift capped longer-dated rates and sent interest rate-sensitive stocks flying. The Santa Claus rally was in full effect with a December announcement from Fed Chairman Powell that inflation was all but beaten and opening the door to rate cuts in 2024, although there is a clear divergence from what the Fed telegraphed and what markets are interpreting. Growth stocks were again the dominant driver of performance in the quarter. For the year, growth bested value by over 30 percentage points, with the Magnificent 7 (mega-growth stocks like Apple, Amazon and Tesla) providing a huge boost to returns. In an indication of just how concentrated the market was in 2023, the spread between the S&P500 index and the S&P500 equal-weight index (where each stock has the same weight, versus the traditional index which is weighted by company size) was the largest since the years leading up to the dot com bust: 68% of the traditional S&P500 return came from the largest 10 stocks. The Emerging Market index continued to stand out for all the wrong reasons, but much of the relative performance lag stemmed from poor performance by Chinese stocks. The price returns from Bitcoin show just how “risk-on” investor appetite was.
Investors’ euphoric outlook over the rapid government stimulus that followed the implosion of Silicon Valley Bank drove markets higher throughout the first seven months of the year. On July 31, the S&P 500 hit a new recovery high of 4,588.96 carried by the impressive performance of mega-cap growth stocks, especially the “Magnificent Seven.” A gentle decline through August gained momentum in September as markets were confronted with a host of headwinds from sticky inflation to a looming government shutdown to (perhaps paradoxically) a resilient job market and economy. As stock markets were getting their wings clipped, bond yields were exploding to the upside with the 10-year note ending the quarter at 4.6% and the 30-year at 4.7%, higher than they were at the end of June by 76 and 85 basis points respectively. Value and growth stocks saw a near identical return for the quarter only after value outperformed by nearly 160 basis points in September. In an
interesting twist during an otherwise “risk off” quarter, Emerging Markets stocks fared better than US and developed international equities.