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2023 Returns Supercharged by Year-end Rally 

January 4, 2024


The year-end rally of 2023 was largely fueled by a more dovish Federal Reserve. After enduring elevated inflation and higher interest rates for much of the year, investor sentiment and most asset classes received a boost when the central bank indicated it would pivot to rate cuts in 2024 during its December policy meeting.


All asset classes gained in 2023, except the U.S. dollar, commodities, banks, and Chinese stocks. However, market participation broadened in December as investors priced in additional rate cuts for 2024, fueling underperforming sectors, such as banks, to outperform for the month.


U.S. stocks that underperformed in 2022, especially large cap growth and technology, led the way in 2023. On a total return basis, the Nasdaq gained 44.6% and growth stocks delivered 30.0%. The S&P 500 gained 26.3%.


Fixed income finished the year positive after two years of negative returns, with U.S. investment-grade corporate bonds gaining 8.5% and high-yield bonds returning 13.4%. Municipal bonds delivered over 6% while U.S. Treasuries generated over 4%.


While we don’t expect U.S. equities to repeat the enormous gains of 2023, history suggests that in years following returns of 20% or more in the S&P 500, the stock market ends higher 80% of the time. Although the strong end-of-year performance suggests the market is pricing in a soft landing, it may be overly optimistic on the timing and magnitude of rate cuts. Our outlook is for a healthy slowdown, lower inflation, modest rate cuts, and a pickup in earnings growth, which should lead to more normalized single-digit returns across most asset classes in 2024.



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