What did we see in Q4 2023?
Concerns among investors of a continued aggressive Fed stance impacted the start of Q4:2023 with pessimistic sentiment driving declines in equity and fixed income markets in October.
The interest rate narrative of “Higher for Longer” was supported by stronger than expected labor market, Q3 GDP growth, spending and inflation data.
Additionally, an escalation in geopolitical risk following the October 7 Hamas attack on Israel and last-minute Congress debates on the Federal debt limit and a potential US Government shutdown created further market indigestion.
As markets transitioned in the second half of the quarter, weaker economic data (such as lower than expected payrolls and ISM Manufacturing data for October) and a less aggressive Fed which held rates unchanged strengthened the view that we are at the end of the rate-hiking cycle.
At the same time, corporate fundamentals remained strong with Q3 S&P 500 earnings up 4.6%, while 82% of companies produced positive earnings surprises. As a result, stock prices and long-term interest rates reversed direction and produced powerful rallies for both equity and fixed income markets.
The S&P 500 index produced nine straight weekly gains, while the bond market, after causing much pain for investors in the first 10 months, ended the year roughly where it started with the 10-Year Treasury yield at around 3.9%.
Volatility in Equity markets also ended at the lowest levels since December 2019. The Fed’s unanimous vote to hold rates steady in December and markets expectations for six rate cuts in 2024 further added to momentum.
What does this mean for your portfolio?
CWB portfolios saw positive returns in Q4:2023:
- Portfolios with higher levels of Equities exposure generated higher returns as expectations for a significant reduction in interest rates in 2024 ignited a risk-on environment.
- Portfolios with higher exposure to Growth Equities also benefited as lower rates generated expansion in valuation multiples.
Overall, portfolios experienced one of their best quarterly gains on record as moderating interest rate pressures supported both Equities and Fixed Income.
What kind of impact did we see to Equities and Fixed Income asset classes?
- Global Equities gained 11.0% while Global Bonds appreciated by 6.0%.
- US Equities outperformed other regions as the Russell 1000 Index climbed 12.0% while US Investment Grade Bonds improved by 5.5%.
- Non-US Developed Equities gained 10.5% with stronger performance in Europe while Emerging Market Equities returned 7.9%. Latin America was the strongest performing region while China Equities declined by 4.2%, weighing on overall returns.
- In the US, Growth Equities outperformed Value Equities, supported by declining interest rates while Small Cap Equities outperformed Large Cap (helped by a 12.0% gain in December alone).
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What’s in store for Q1’ 2024?
So far in 2024, economic data continues to support a view of moderate growth and contained inflation while stable labor markets allow for resilient consumer spending.
Inflation appears to be resetting lower while easing wage pressures are expected to drive earnings recoveries. After the 2022-2023 bear market, income and growth, the driving pillars of investment returns, appear to have been reinvigorated.
The growth parts of portfolios are expected to benefit from strength in other industries which were neglected in 2023. Quality growth stocks can potentially offer attractive opportunities while diversification across regions, sectors and themes could prove beneficial as well.
In Fixed Income, peak rates have set the stage for further gains as the Fed is expected to reduce rates in 2024 regardless of the economic backdrop.
While excess supply and concerns about Washington’s apparent inability to reign in spending will remain a key risk, falling inflation and weaker employment as well as Fed easing should result in lower yields.
As we look at potential risks for 2024, geopolitical and election risks are the first that come to mind. With two wars raging and major elections on every continent, history has shown that in periods when events merely cause fear but don’t deliver a catastrophe, staying invested in a diversified portfolio while taking advantage of dislocations has been most beneficial.
Market Performance | Q4 2023 Total Return
| Investment Options | Q4 | YTD | 1-Year | 5-Year | 10-Year |
|---|---|---|---|---|---|
| Cash & Cash Equivalents Open Asset Glossary Modal: Cash & Cash Equivalents | 1.4% | 5.3% | 5.3% | 1.9% | 1.3% |
| Investment Grade Bonds Open Asset Glossary Modal: Investment Grade Bonds | 6.8% | 5.5% | 5.5% | 1.1% | 1.8% |
| US Munis Open Asset Glossary Modal: US Munis | 5.5% | 4.6% | 4.6% | 2.0% | 2.2% |
| US Large Cap Equities Open Asset Glossary Modal: US Large Cap Equities | 12.0% | 26.5% | 26.5% | 15.5% | 11.8% |
| US Small/Mid Cap Equities Open Asset Glossary Modal: US Small/Mid Cap Equities | 14.0% | 16.9% | 16.9% | 9.9% | 7.1% |
| Non-US Developed Equities Open Asset Glossary Modal: Non-US Developed Equities | 10.5% | 17.2% | 17.2% | 8.2% | 4.3% |
| Emerging Markets Equities Open Asset Glossary Modal: Emerging Markets Equities | 7.9% | 9.8% | 9.8% | 3.7% | 2.7% |
* Depending on your risk tolerance, your CWB portfolio could be comprised of one or all of the asset class indexes listed above. Returns above sourced from Morningstar as of 12/31/23. Asset allocation and diversification do not guarantee a profit or protect against loss. This material is brought to you by our investment professionals at Citi Investment Management (CIM).