Perspectives Newsletter: Q4, 2023
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.
