2023 Highlights
Looking back at 2023, there’s a lot to feel good about.
- We avoided a recession, and the economy grew by a respectable 2.4%.
- Inflation is down to 3.1% after lingering at 7% and 6.5% in 2021 and 2022 respectively.
- Job growth has remained strong with unemployment hovering around 3.7%.
- The Federal Reserve has signaled they’re done raising interest rates and plan to lower rates in 2024.
- The S&P 500 is up an impressive 25% for the year.
- Aggregate bond indexes rose by 3+% after declining by 12% in 2022.
Is everything perfect? No, but we’re definitely in a better position than we were a year ago and there are many reasons to look forward to 2024.
Stocks & Bonds – Continued Volatility that Trended Up
As expected, some of the volatility we experienced in 2022 continued in 2023. There were some ups and downs over the first three quarters of 2023, but the fourth quarter was solidly up, which made for a strong end of the year.
In the equity markets, we had a good run for the first six months of 2023. Then from late July through October, we saw a 10% correction in the S&P, which was expected. We recognized the market was a little overvalued when we looked at price-to earnings ratios along with some other valuations. By the end of October, we could see the market coming back, which triggered a buying opportunity for us.
In 2023 the 10-year treasury held at 4.25% until around mid-year when there was some discussion that interest rates might stay higher for longer. That led to a run up in 10-year treasury bonds that topped out at around 5% by mid-October. Since then, T-bonds reversed course, and the 10-year yield ended the year at around 3.9%.
Impact of Interest Rates & Talk of Future Cuts
The Federal Reserve continued to raise interest rates for the first half of the year, but since July the Fed has held rates steady at 5.25% – 5.5%. In December, the Fed announced it plans to leave rates unchanged and expects to make as many as three rate cuts in 2024. The bond market is something of a predictor for where interest rates are headed and based on how quickly the 10-year treasury dropped from 5% yield in October, down to 3.9%, Wall Street bond traders expect there’s going to be more than three rate cuts. Typically, bonds gain value as interest rates are declining and rate cuts could also bring strong performance in the stock market.
Not All Indicators are Positive
While we can point to many positive trends in 2023, some economic indicators are more concerning.
- There’s been a small jump in the unemployment rate.
- We’re at an all time high for consumer credit card debt.
- Overall consumer confidence has been relatively low throughout the year, which could lead to less consumer spending.
In 2023, consumer spending was still strong, but most people spent money on experiences instead of things. For instance, a family paying to vacation at a nice resort, might not have been willing to drop a few hundred dollars at the resort shop on clothing or other items.
Uncertainty in the Housing Market
As we head into 2024, there’s a lot of uncertainty in the housing market. One big problem right now is with supply. Currently, there are too few homes for sale versus people who want to buy, which has driven prices up. While lower interest rates should bring more buyers back to the market, it could also push prices up further. On the plus side, increased demand could encourage more potential sellers to swap houses, even if they have to trade a 30 year mortgage at 3% for new note at higher rate.
Any benefits lower interest rates have on the housing market could be cancelled out by rising consumer credit card debt, and auto loan defaults which have risen significantly over the past couple of months. Another potential drag on real estate is student loan repayments, which started again last October after a 42 month hiatus. All of these factors would be compounded by an economic slowdown and rising unemployment.
What to Watch for in 2024
Here are three things to watch for in 2024:
- Interest Rates: Whether the Fed cuts rates and if they do, by how much, is probably the top factor affecting how the markets perform on a day-to-day basis.
- General economic indicators: In particular, focus on GDP, unemployment, and inflation. We’d like to see continued stability, but if these indicators trend downward, that could signal a recession to come.
- Election year: Historically, the market doesn’t care who wins an election. What the market doesn’t like is uncertainty. For that reason, we tend to see more volatility in election years.
The start of a new year is always an exciting time. At Marshall Financial Group, it’s also an opportunity to demonstrate to clients once again how much we appreciate being chosen to serve as your financial partners.
If you have any questions about your portfolio, don’t hesitate to call us. We look forward to another year of helping clients build wealth and make progress on all your financial goals.