A year-end rally in equity markets led to sizable gains in the major stock averages, with the Dow, NASDAQ, and S&P 500 indices finishing the year with double-digit returns. The appreciation of stocks and bonds over the past year was the mirror image of losses incurred during a tumultuous 2022. Much of the recent optimism has been driven by the excitement around Artificial Intelligence (AI), which has pushed the largest technology stocks to ever-higher valuations. Of course, the potential for AI stretches far and wide, and should benefit companies in all industries as the deployment of AI spurs productivity gains throughout the broader economy.
The ongoing bull market has not just been limited to U.S. markets, as stocks in Europe and Japan have also risen in price. In the case of Japan, great progress has been made in corporate governance, promoting the creation of shareholder-friendly management teams and improved business results at Japanese companies. Another investment theme from 2023, benefiting fixed income investors, came in the form of 5% income yields on cash balances. These high interest rates led to a record $5.9 trillion allocated to money market mutual funds as investors were attracted to the dual combination of a safe investment and a competitive return.
While the Federal Reserve made substantial progress on the inflation front in 2023, clouds remain on the horizon for the broader economy. Some economists are calling for “rolling recessions” in 2024, which would involve various segments of the economy (i.e., manufacturing, real estate, healthcare) experiencing contractions at different times. Overseas, the International Monetary Fund is calling for lower GDP growth for the world economy, as companies in China and Europe struggle to find their stride amidst increased geopolitical tensions and lower trade volumes. On a related note, the toxic combination of energy price inflation and high interest rates, plaguing both the twenty-member Eurozone and the United Kingdom, has proved formidable.
Economic challenges in the U.S. are anticipated in both the residential and commercial real estate domains. In the housing market, 30-year mortgage rates over 7% have pushed purchase and sale activity to a 40-year low. On the commercial real estate front, $550b of property debt maturing in 2024 has banks and investors bracing for losses. Finally, the upcoming U.S. presidential election is expected to stir up volatility in the financial markets throughout the year. Nonetheless, investors will want to maintain their focus on longterm objectives while finding comfort in the strong historical returns generated by the S&P 500 during past presidential elections and in the ensuing years.
