2023 Illustrated Market Review
 |
Key Takeaways
|
If there’s a message to take from 2023 markets, it is this: Timeless wisdom best informs timely decisions.
Here’s how Morgan Housel describes the same in his new book, “Same as Ever.”
“The typical attempt to clear up an uncertain future is to gaze further and squint harder—to forecast with more precision, more data, and more intelligence. Far more effective is to do the opposite: Look backward, and be broad. Rather than attempting to figure out little ways the future might change, study the big things the past has never avoided.”
Following are a few timeless tenets that offer timely investment insights for the year ahead.
There’s Almost Never a Good Time to Time the Market
Perhaps most obviously, last year demonstrated how randomly—and rapidly—markets can move. As The Wall Street Journal reported at year-end:
“Almost no one thought 2023 would be a blockbuster year for stocks. They could hardly have been more wrong.”
Another financial journal observed:
“What was supposed to go up went down, or listed sideways, and what was supposed to go down went up — and up and up. The S&P 500 climbed more than 20% and the Nasdaq 100 soared over 50%, the biggest annual gain since the go-go days of the dot-com boom. … ‘I’ve never seen the consensus as wrong as it was in 2023,’ said Andrew Pease, the chief investment strategist at Russell Investments.”
Many financial pundits offered elaborate explanations for the year’s fortunes, and why (in hindsight) their projections were so far off. While their reasons may be accurate, the implication is, were it not for this, that, or the other thing, their forecasts would have been correct.
The problem is, there’s almost always “this, that, or the other thing” going on in this big, busy world. Thus, it really should come as no surprise that routine surprises regularly randomize the market’s next moves.
We’ve known this for years—since at least 1973, when Burton Malkiel published the first edition of “A Random Walk Down Wall Street.” Even after 50 years, Malkiel’s message represents one of the most timeless truths explaining why we don’t try to time market trends.
There might be one time it makes sense to time the market - when it's down. Just don't wait to act. Invest early, often, and throughout all market cycles.
"Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves".1
Beware of Catchy Catchphrases
In 2023, just seven stocks within the S&P 500 Index explained almost two-thirds of the index’s total annual gains. Their striking performance scored them the catchy title, “Magnificent Seven.”
What should we expect for this star lineup in the coming year? Search today’s popular press, and you’ll find timely tips galore on whether to bulk up on more magnificence, or sell while the selling is good. Forecasts hinge on the usual suspects: Whether inflation rises or falls, a recession lands or recedes, technologies advance or retreat, and so on.
Taking a more timeless view, we would suggest being wary of celebrated stocks bearing trendy titles. Chasing after stellar returns with their own nicknames may work for a while. But eventually, one of those “surprises” tends to come along, turning once-hot stocks into cold plays.
Which brings us to our next timeless tenet.
Diversification Remains Perennially Prudent
Viewing 2023 up close, there may be a temptation to chase after the market’s recent winning streak, bulking up on more of that which has been so pleasantly surprising of late.
Zooming out, our perspective remains unchanged: We recommend maintaining a globally diversified portfolio, tailored for your needs. Treat an allocation to the Magnificent Seven (and the next trend, and the one after that) as one of many “pistons” powering the market’s perennial growth. But pair it with effective diversification, to temper the inevitable upsets that await us in the year(s) ahead.
In this spirit, we wish you a well-diversified investment portfolio in 2024, along with abundant concentrations of health, happiness, and harmonious well-being for you and yours.
Market Summary
2023 INDEX RETURNS
Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2024, all rights reserved. Bloomberg data provided by Bloomberg.
US Stocks
2023 INDEX RETURNS
The US stock market posted positive returns for the year and outperformed both non-US developed and emerging markets.
It was a year that defied expectations by many accounts. A number of forecasts predicted that the US economy would enter a recession in 2023 as the Federal Reserve raised interest rates to fight high inflation. But the economy remained resilient, inflation eased, and the Fed declined to lift rates later in the year. US stocks rose in 2023, despite some setbacks along the way.2 Many economists who called for a recession have since walked back their predictions. This underscored that guessing where markets may be headed is not a reliable way to invest.
A year that many speculated would be lackluster for US stocks saw the S&P 500 post gains of 26.3% on a total-return basis, extending a bull-market rally that began in 2022.3
US inflation continued to retreat from June 2022’s four-decade high of 9.1%, with the 12-month rise in consumer prices falling to 3.1% in November, a lower level than many had expected.4 After raising rates three times in the year’s first half, the Fed made only one additional increase later in 2023. Policymakers indicated they will likely continue to hold interest rates steady, despite inflation remaining above its 2% target.
Against this backdrop, even while the broad economy remained strong, some sectors, such as real estate and finance, lagged.5 Higher interest rates dampened home sales and new development activity. In the financial sector, the rapid rate increases in early 2023 left some regional lenders, such as Silicon Valley Bank, in precarious financial positions, with the value of their long-term Treasury bonds sinking. Many nervous depositors withdrew their cash, resulting in three of the four largest bank failures on record (after Washington Mutual in 2008).
In Washington, politicians debated the US debt ceiling and government funding. The president and Congress eventually agreed to raise the debt limit in June, avoiding a US default. Despite the two-year spending deal, Fitch downgraded its credit rating on US debt, citing the country’s rising fiscal deficits and “the erosion of governance” that has led to multiple clashes over the debt limit in recent decades. However, stock and bond markets seemed to take the news in stride. While debt ceiling debates and credit rating downgrades often dominate headlines, implications for investors can be muted. The US government temporarily averted a shutdown after the House and Senate passed short-term funding deals in September and again in November. The threat of a shutdown still looms if a longer-term funding resolution isn’t reached in early 2024, but, as for stock returns, history shows the result of a shutdown isn’t necessarily poor equities performance.
Ranked Returns (%) - US
World Market Capitalization - US
Period Returns (%) - US
Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Value (Russell 1000 Value Index), Large Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Value (Russell 2000 Value Index), and Small Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2024, all rights reserved.
Global Stocks
2023 INDEX RETURNS
Global stock markets also bounced back after posting their worst year since the financial crisis. Stocks, as measured by the MSCI All Country World Index, rose 22.2% even as geopolitical tensions increased, with war continuing in Ukraine and hostilities erupting in the Middle East.6
Moving on Up
Past performance is not a guarantee of future results. In USD. MSCI All Country World Index, net dividends in 2023. MSCI data © MSCI 2024, all rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Headlines are sourced from various publicly available news outlets and are provided for context, not to explain the market's behavior.
The global stock market can be separated into two parts: (1) international developed stocks and (2) emerging market stocks.
(1) International Developed Stocks
International developed stocks, as represented by the MSCI World ex USA Index, added 17.9%.
Ranked Returns (%) - International Developed
World Market Capitalization - International Developed
Period Returns (%) - International Developed
Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index is used as the proxy for the International Developed market. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
(2) Emerging Markets Stocks
Emerging markets notched smaller gains, with the MSCI Emerging Markets Index up only 9.8%.7
Ranked Returns (%) - Emerging Markets
World Market Capitalization - Emerging Markets
Period Returns (%) - Emerging Markets
Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for the emerging market portion of the market. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Country Results
2023 INDEX RETURNS
Hungary recorded the highest country results (after posting the lowest country results in 2022), while Hong Kong posted the lowest returns for the year.
Past results is no guarantee of future results. Country returns are the country component indices of the MSCI All Country World IMI Index for all countries except the United States, where the Russell 3000 Index is used instead. Global is the return of the MSCI All Country World IMI Index. MSCI index returns are net dividend. Indices are not available for direct investment. Their results does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. MSCI data © MSCI 2024, all rights reserved.
Real Estate Investment Trusts (REITs)
2023 INDEX RETURNS
US and global real estate increased in 2023. The Dow Jones US Select REIT Index rose 13.96%, and the S&P Global REIT Index rose 5.59%.
Ranked Returns (%) - Real Estate
Total Value of REIT Stocks
Period Returns (%) - Real Estate
Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Commodities
2023 INDEX RETURNS
The Bloomberg Commodity Total Return Index returned -7.91% for the year.
Natural Gas and Nickel were the worst performers, returning -67.07% and -47.21% during the year, respectively. Coffee and Sugar were the best performers, returning +18.82% and +13.39% during the year, respectively.
Ranked Returns for Individual Commodities (%)
Period Returns (%) - Commodities
Past results is not a guarantee of future results. Index is not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Commodities returns represent the return of the Bloomberg Commodity Total Return Index. Individual commodities are sub-index values of the Bloomberg Commodity Total Return Index. Data provided by Bloomberg.
Bonds (Fixed Income)
2023 YiELD CURVES
Interest rate changes were mixed in the US Treasury market for the year.
US Treasury Yield Curve (%)
On the short end of the yield curve, the 1-Month US Treasury Bill yield increased 148 basis points (bps) to 5.60%, while the 1-Year US Treasury Bill yield increased 6 bps to 4.79%. The yield on the 2-Year US Treasury Note decreased 18 bps to 4.23%.
The yield on the 5-Year US Treasury Note decreased 15 bps to 3.84%. The yield on the 10-Year US Treasury Note was unchanged at 3.88%. The yield on the 30-Year US Treasury Bond increased 6 bps to 4.03%.
Bond Yields Across Issuers (%)
In terms of total returns, short-term US treasury bonds returned +4.37% while intermediate-term US treasury bonds returned +4.28%. Short-term corporate bonds returned +6.20% and intermediate-term corporate bonds returned +7.29%.*
The total returns for short- and intermediate-term municipal bonds were +3.58% and +5.04%, respectively. Within the municipal fixed income market, general obligation bonds returned +5.62% while revenue bonds returned +6.89%.**
Period Returns (%)
* Bloomberg US Treasury and US Corporate Bond Indices
** Bloomberg Municipal Bond Index
Past results is not a guarantee of future results. Indices are not available for direct investment. Index results does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds, and the Yield to Worst are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA Corporates, BBB-A rated. Bloomberg data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2024 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2024 ICE Data Indices, LLC. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Global Bonds (Fixed Income)
Interest rate changes were mixed within global developed markets for the year.
In Japan, short-term interest rates decreased while longer-term interest rates generally increased. In Germany, Canada, and Australia, short-term interest rates increased while longer-term interest rates generally decreased. In the UK, interest rate changes were mixed.
Realized term premiums were generally positive within global developed markets, as longer-term bonds generally outperformed shorter-term bonds.
In Japan, ultrashort-term nominal interest rates were negative. In the UK, Germany, Canada, and Australia, the short-term segment of the yield curve inverted.
Changes in Yields (bps) since December 31, 2022
One basis point (bps) equals 0.01%, so, in the table below, "6.4" equals +0.064%.
Source: ICE BofA government yield. ICE BofA index data © 2024 ICE Data Indices, LLC.
What Will 2024 Bring?
Economic resilience in the US and elsewhere is helping boost the global outlook for 2024, but as investors learned last year, the only thing certain is that there will be plenty of uncertainties. Many variables are in play for markets this year, from wars in Ukraine and the Middle East to questions around interest rates. Investors are also likely to be closely following the upcoming presidential election in the US. But it’s worth noting that the political party that wins the White House is just one of many factors investors consider when pricing assets, and stocks have generally trended upward regardless of which party holds the presidency. This may be reassuring when one considers the difficulty, or perhaps futility, of trying to guess what is going to happen in 2024—or any year.
Could you use an experienced hand to keep your complete financial picture in focus? We’re here to help!
ASK US TO SHOW YOU WHERE YOU STAND.
You can reach us at (775) 827-0670 and advice@openwindowFS.com. Send us a quick note at www.openwindowFS.com/quicknote or schedule some time with us at www.openwindowFS.com/connection.
FOOTNOTES & SOURCES
Some content was provided by Dimensional Fund Advisors, LP, and adapted by Open Window Financial Solutions, Ltd.
- Peter Lynch managed Fidelity Investment's Magellan Fund between 1977 and 1990, racking up a 29.2% annual return, consistently more than double the S&P 500 stock market index and making it the best-performing mutual fund in the world. "Peter Lynch." Wikipedia, Wikimedia Foundation, 26 April 2022.
- Based on the 2023 calendar-year return of the Russell 3000 Index, which rose 26.0%.
- S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
- Inflation data as defined by the Consumer Price Index (CPI) from the US Bureau of Labor Statistics.
- The real estate and financial sectors of the Russell 3000 rose 24.1% and 14.1%, respectively, vs. 26.0% for the index.
- MSCI data © MSCI 2024, all rights reserved.
- Based on the 2023 calendar-year returns of S&P and MSCI indices.