The year started quickly, with the S&P 500 up 6% in January, and by mid-year, it was up 16%. After the market pulled back through October, we saw a fourth-quarter rebound, leading to strong returns for 2023. The Fed’s rate pauses and anticipation of cuts in 2024 helped spark the risk-on rally across both stocks and bonds. The rally was particularly robust in large-cap, which ended the year within striking distance of a record high, while small, mid, and foreign stocks rallied but not nearly as much.
As a reminder, the index returns above should only be used as a very broad point of reference.
Cash & Fixed Income: Municipal bonds led for the quarter, high-yield corporate bonds led for the past 1, 5, 10, and 15 years, and cash led for the past 3 years. Cash was the laggard for the quarter, 1, 10, and 15 years while aggregate bonds were the worst performer for the past 3 and 5 years.
Bond yields are now in the 5% - 7% range, and money market is paying over 5% annualized. We believe this supports a more sustainable environment where these assets can provide a true diversification from stocks without having to take on excessive risk and reach for yield.
Equities: Large U.S. stocks outperformed other equity categories for all periods other than the quarter, where small-cap was the best performer. Foreign was the worst performer for the quarter, 5, 10, and 15 years, while small-cap stocks were the laggard for the past 1 and 3 years.
Throughout 2023, we remained tilted towards higher quality in both bonds and stocks. In December, we strategically sold stock positions at a loss to offset gains taken earlier in the year and reduce client tax liability. Higher quality will continue to be our focus in both stocks and bonds as we head into the new year.
Going into 2024, we are cautiously optimistic that any slowdown will be minor as companies remain reticent to lay off employees. We believe the Fed is likely done raising interest rates. The economy is adjusting to this new rate environment while providing a more sustainable path going forward. We continue to believe that a diversified portfolio still provides the best risk-adjusted returns to meet your financial goals.
Entering a new year is always a good time to have a conversation about your 2024 goals to ensure your portfolio continues to meet both your short and long-term needs. We look forward to chatting with you, and Happy New Year!