Santa Claus came bearing gifts to investors in December, as both stock and bond markets rallied into year-end to cap a profitable 2023.
The S&P 500, a benchmark for large cap US stocks, added 4.5% in December for a +26% full-year return, closing just short of a new all-time high.
Smaller company stock prices surged +12% this month but underperformed large caps for the third consecutive year, with the Russell 2000 index finishing the year at +17%.
Overseas stocks gained +5% this month but ended the year behind their US counterparts, with the MSCI ACWI ex-US Index logging a +16% gain in 2023.
Within fixed income, ten-year treasury yields fell after another tame inflation print, with investors now expecting the Fed’s first rate cut to arrive with the March meeting. The Bloomberg US Aggregate Bond Index rallied +3.8% in December for a +5.5% full-year gain, after spending most of 2023 in the red.
Commodities were the sole major asset class in negative territory in 2023, losing -8% after falling another -2.7% in December.
Our data driven Three Dials readings were once again unchanged heading into the new year, as we outline below:
After riding a seasonal surge into year-end, equities now look somewhat overbought, with the S&P closing out the year roughly 10% above its long-term moving average.
While overly bullish sentiment is likely to moderate in the new year, the long-term setup for equities remains favorable, which leaves our Momentum Dial in a Positive position heading into 2024.
While the 2023 economy was largely powered by the strength of the US consumer, 2024 may face headwinds as pandemic-era excess savings are set to run out in the first half of the year.
While we await the unwinding of the most aggressive monetary tightening policy in recent history, our Economic Dial remains in a Negative position.
Despite getting a boost from lower long-term interest rates, US corporate earnings expectations have fallen steadily in recent months, which puts a strain on already elevated price-to-earnings ratios. As such, our Valuation Dial remains in a Negative position.
Our composite Three Dials reading remains in a Moderately Defensive position going into 2024, with two dials Negative and one dial Positive.
Sources: Morningstar