Quarterly Market Performance Commentary

Q4 2023 closed out an exceptional year for equity investors with the S&P 500 returning an annual gain of 25%, coming within a mere 0.3% of its January 2022 all-time high. Similarly, the Nasdaq surged by an impressive 44% in 2023, standing approximately 6% away from its record peak from November 2021.1 Quarterly performance was once again primarily driven by the “Magnificent Seven” stocks—Apple, Amazon, Alphabet (“Google”), NVIDIA, Meta, Microsoft, and Tesla— which played a pivotal role in steering upward trajectory with a collective 75% return through mid-December.2 These key stocks have exerted dominance over market performance throughout 2023 and were the primary contributors to the annual returns in most major indices. Figure 1, below, vividly illustrates the impact of these 7 key stocks.  Without them, the S&P 500 would have had a substantially more modest 12% return in 2023 through mid-December.

Figure 1: Magnificent Sevens Returns vs. the Broader Market

While stock performance was the most eye-catching aspect of the markets this year, the more nuanced landscape of fixed income had its highlights as well. After an extended period of rising yields, one that brought pain to many bond investors in 2022 and 2023, yields appear to have peaked just below 5% in October, with the 10-year U.S. Treasury yield experiencing a swift retreat, falling below 4%. Anticipating potential rate cuts from the Federal Reserve in early 2024, there is now high conviction among investors that interest rates have indeed peaked and that investment in highly rated corporate bonds may prove to be successful moving forward, even if the broader market brings significant volatility.3

Economic Fundamentals – Q4 2023

After a significant period of uncertainty from the start of the global pandemic to 2023, it appears that the economy may now be settling. Improvements in supply chain bottlenecks, cooling of the energy and commodity markets, and the Federal Reserve’s monetary policy adjustments, appear to be driving down inflation4. Looking at the personal-consumption expenditures price index, the Fed’s preferred inflation measure, there has been a drop of 0.1% in November (see Figure 2, right) – the first since April 2020.5 The drop in inflation, coupled with consistent consumer spending, has enabled the economy to readjust without falling into a recession. Many economists now expect that the elusive soft-landing, where inflation returns to the Fed’s target 2% inflation

Figure 2: Personal Consumption Expenditures Price Index Monthly Changes

rate without the economy falling into a recession, appears likely. One such economist, Michael Saunders, senior advisor at Oxford Economics, believes US inflation will drop to 2.2% by Q4 of 2024, only 0.2% above the Fed’s target inflation rate of 2%.4 With this trajectory, the Federal Reserve has begun signaling its intentions of steadily dropping interest rates throughout 2024 with a projection of at least three rate cuts.6 Bonds and mortgages have started to adjust to this expected drop as prices rise and interest rates have begun to drop. The average rate on a 30-year fixed mortgage dropped to 6.61%, the lowest it has been since June.7 With inflation steadily dropping, the Fed has begun to pivot and focus on its other primary mandate—unemployment. Labor markets began to cool in Q4 2023, and economists expect that this trend will extend into 2024 with hiring and wage growth slowing.8

Presidential Election’s Impact on Market

As the calendar flips to 2024, the presidential election year is now underway. Campaigning will soon swing into high gear, promising a relentless stream of headlines and an atmosphere full of speculation. Presidential elections have always been pivotal in shaping public policy, foreign relations, and the overarching trajectory of the nation. This will often lead investors to ask questions about the correlation between the election cycle and financial markets. Interestingly, a review of historical data suggests that the impacts may not be as pronounced as one might expect.

Reviewing historical financial market trends reveals that, while there are some minor trends that can be identified, the presidential election cycle’s overall impact on the markets is relatively small.  Research conducted by

Figure 3: Hypothetical Growth of $1 Invested in the S&P 500 Index

Vanguard reveals that, since 1860, there has been no statistical relationship between the performance of a balanced 60% equity/40% bond portfolio in election versus non-election years.9 Regardless of the president or political party that is elected, disciplined investors have been rewarded over time (see Figure 3, above).

As the 2024 presidential election looms, retirement plan participants should strive to remain calm and hold a steady course. The key to navigating ups and downs is maintaining an asset allocation strategy that adjusts over time as a participant’s risk profile changes. This approach includes fostering a diversified portfolio and focusing on long-term goals rather than getting sidetracked by short-term market fluctuations. Regardless of the election’s outcome, the wisdom of this approach remains unaltered in shaping sound retirement investment decisions.

IRS Limit Update for 2024

In Q4 2023, the IRS announced its annual updates to limits for retirement plans. These adjustments, influenced by inflation and changes in cost-of-living, are pivotal for individuals strategizing for their retirement.10 For employer-sponsored plans (401(k), 403(b), and 457 plans), individual contribution limits will increase $500 to $23,000 in 2024. Annual catch-up contributions for those aged 50 and over will remain the same at $7,500 (or a total of $30,500).  For details on these new limits, and others, see Figure 4, right.

It is crucial for retirement plan participants to consider the new limits in their financial planning. For those able to afford it, adapting contribution strategies in response to these changes can significantly impact long-term retirement planning outcomes and result in a more secure and comfortable retirement.

Figure 4: 2024 IRS Contribution Limits
  1. Singh, Hardika. “Santa Might Have One Last Gift for Investors” The Wall Street Journal, 28 December 2023, www.wsj.com/finance/stocks/santa-claus-rally-stock-market-2023-3d3d2c6f?st=whlb2knkvelp6fm&reflink=desktopwebshare_permalink.
  2. Singh, Hardika. “It’s the Magnificent Seven’s Market. The Other Stocks are Just Living in It.” The Wall Street Journal, 17 December 2023, https://www.wsj.com/finance/stocks/its-the-magnificent-sevens-market-the-other-stocks-are-just-living-in-it-5d212f95
  3. Wallerstein, Eric. “Wall Street Doubles Down on Bonds” The Wall Street Journal, 8 January 2024, https://www.wsj.com/finance/investing/wall-street-doubles-down-on-bonds-8c46bade?mod=Searchresults_pos2&page=1
  4. Guilford, Gwynn. “For Much of the World, Inflation Will Be Normal in 2024—Finally” The Wall Street Journal, 24 December 2023, https://www.wsj.com/economy/central-banking/inflation-2024-outlook-economy-98defce9
  5. Harrison David; Omeokwe, Amara. “Prices Fell in November for the First Time Since 2020. Inflation is Approaching Fed Target.” The Wall Street Journal, 22 December 2023, https://www.wsj.com/economy/what-to-watch-in-fridays-spending-report-inflation-closing-in-on-feds-target-0778037d
  6. Timiraos, Nick. “Powell’s Pivot Sows Confusion Over When and How Fast Fed Will Cut” The Wall Street Journal, 20 December 2023, https://www.wsj.com/economy/central-banking/powells-pivot-sows-confusion-over-when-and-how-fast-fed-will-cut-66495602?page=1
  7. Grant, Charley. “The S&P 500 Closes Just Shy of a New Record” The Wall Street Journal, 28 December 2023, https://www.wsj.com/finance/stocks/global-stocks-markets-dow-news-12-28-2023-d650f5b8
  8. Sparshott, Jeffrey; Rubin, Gabriel T. “Where the Job Market Is Heading in 2024, in Six Charts” The Wall Street Journal, 1 January 2024, https://www.wsj.com/economy/jobs/where-the-job-market-is-heading-in-2024-in-six-charts-49f5c5f5
  9. “Presidential elections matter but not so much when it comes to your investments” Vanguard, 26 October, 2023, https://investor.vanguard.com/investor-resources-education/article/presidential-elections-matter-but-not-so-much-when-it-comes-to-your-investments
  10. Yale, Aly “Here Are the 401(k) and IRA Contribution Limits for 2024. Are You Saving Enough?” The Wall Street Journal, 2 November 2023, https://www.wsj.com/buyside/personal-finance/401k-ira-contribution-limits-2024-444f7273