Quarterly Economic Review: Fourth Quarter 2023

Key Takeaways

• Global growth bested pessimistic expectations coming into the year and the widely anticipated recession of 2023 never came to fruition.
• The labor market has been a consistent source of economic growth despite a tempering of hiring and a small uptick in the domestic unemployment rate.
• The Fed entered the year committed to fighting inflation above all else, following through with four rate hikes resulting in a Fed Funds rate of 5.5%. Consensus indicates policy rates peaked and cuts are now on the table.
• Inflation fell precipitously across the developed world, bringing more recent year-over-year changes closer to target levels. The focus going forward will likely pivot to prioritize maintaining growth while keeping inflation at bay.
• Miraculously, the U.S. Treasury 10-year yield ended the year little changed from the start. This incremental change dramatically understates the volatility as the 10-year yield reached ~5%, its highest level since October 2007.
• Defying outlooks, 2023 turned out to be a robust year for investment assets. Global stocks had strong momentum throughout the year, while bond markets benefitted from higher yields and declining rates late in the year.
• U.S. market leadership remained historically narrow and the top 10 securities within the S&P 500 now make up over 30% of the index. This is among the highest concentration levels ever.
• Looking forward to 2024, global equity market valuations have risen and, in many cases, are at or above long-term average levels translating to a neutral view on many stock asset classes.
• Bond markets defied the odds producing healthy results in 2023. Starting yields are still compelling in many cases and support a traditional level of exposure to fixed income and duration relative to the past two years.
• Private assets mostly delivered on offering stability and/or enhancing returns in diversified portfolios. Real estate was a notable laggard, but neutral results served to reset valuations and could support forward performance.
• Expectations for 2024 are in stark contrast to 2023 when a recession was expected with near certainty from many experts. Higher valuations across asset classes and known events, such as the U.S. presidential election, will likely keep investors on their toes once again, but a long-term focus and strategy is often the best assurance for achieving financial goals.

Economy

One of the most anticipated recessions in history never came to fruition in 2023. Defying consensus, economic growth remained resilient and in select key cases, accelerated. In the U.S., the GDP quarterly growth rate entered the year at 2.6%, peaked at nearly 5% in Q3, and is expected to end Q4 at roughly 2.5% (according to GDPNow at the time of writing). The labor market served as a key source of strength for the economy.

While the unemployment rate rose modestly to 3.7%, it has remained under 4% for just over two years – the longest streak for this metric since the 1960s and a demonstration of labor market strength. In addition to low unemployment, nearly 3 million new jobs were created last year and labor force participation expanded, helping alleviate some of the shortages created by the pandemic. Productivity also realized outsized gains likely stemming from pandemic-era changes – a rare ‘free lunch’ when it comes to GDP growth. Combined, these dynamics paint the picture of a healthy and more ‘normalized’ labor market that has helped moderate the pace of wage growth, in turn normalizing inflation.

Rampant fears about inflation started to fade into the background as key measures (ex. CPI) were roughly cut in half during the year. Fed Chair Powell entered the year committed to taming inflation as a core goal above all else, distilling prior doubts that there would be a premature pivot. Throughout the year, the Fed raised its policy rate four times culminating in a terminal upper bound of 5.5% - a level that hasn’t been seen in more than 20 years.

So far, U.S. central bank actions have served to slow inflation and the economy without derailing growth – achieving the illusive ‘soft landing’ scenario. An outcome that was aided by further normalizations of supply chain/COVID overhangs and less economic interest rate sensitivity, partially due to a high percentage of fixed-rate mortgages locked in at more tenable levels. Outside of the U.S., international economies are more varied but follow the same rhythm with China so far presenting a notable exception. Despite heightened levels of uncertainty around China’s recovery, more accommodative policy and pessimistic expectations could fuel upside surprise for the region in 2024, barring unforeseen geopolitical uncertainty.

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