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How did capital markets perform in 2023?

For much of the year, U.S. large caps far outpaced most other asset classes. However, nearly all asset classes surged in the fourth quarter.

2023 performance was backloaded chart illustration

2023 was a tale of two distinct periods for capital markets. The first three quarters were primarily defined by rising interest rates and enthusiasm around the emerging artificial intelligence (AI) story. As we’ve discussed previously, seven mega-cap stocks tied to the AI phenomenon, which have come to be known as the “Magnificent Seven,” surged in 2023. Consequently, U.S. large-cap performance, as measured by the S&P 500, far surpassed most other asset classes for the first three quarters. At the same time, the continued rise in interest rates was a headwind not only for bonds, but for global equities and other parts of the capital market as well. In spite of higher yields, core bonds had posted negative performance through the third quarter, lagging the return from cash.

However, the tide notably reversed course in mid-October, largely due to the so-called “Powell pivot” as the Fed stopped hiking rates and markets increasingly bought into a soft-landing scenario in which inflation could recede without a Fed-induced recession. Consequently, long-term yields fell notably as markets priced in expected rate cuts in 2024. That shift in expectations provided a boost to bonds, which went on to easily outperform cash in Q4 and for the year. At the same time, the equity market advance broadened, as cyclical sectors and smaller companies benefited from resilient growth, solid labor market, and an improving inflation and interest rate outlook.

While 2023 ended up being a strong year for capital markets, the path looked quite different across asset classes. Looking ahead, inflation expectations, Fed policy, and the soft landing/hard landing question will remain center stage. How each plays out will be central to investor sentiment and the path ahead for the capital markets.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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