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As 2023 draws to a close, investors have much to cheer about. The S&P 500 ended the year up more than 24%, and the Dow Jones Industrial Average ended near its all-time high. The prospect of easing inflation, economic resilience and lower interest rates has buoyed investors, especially in the last two months of the year.
The benchmark S&P 500 index fell slightly on Friday, the last trading day of 2023, but ended the year up 24.2%. The Dow Jones Industrial Average has risen more than 13% this year, and the Nasdaq has soared 43%, led by gains in big technology companies such as Nvidia, Amazon and Microsoft.
The bull market that began in November helped extend gains within the market, not just big tech companies. Investors also liked the Federal Reserve’s outlook in December: There are plans to lower interest rates Three times in 2024.
Quincy Crosby, chief global strategist at LPL Financial, said the rally signaled a major psychological shift for investors.
“Investors were able to accept the fact that the market was going to end the year on a strong note,” Crosby said. “Above all, we confirmed that broad market participation strengthened the gains for small and medium-sized stocks and was particularly important.”
Most major indexes were able to erase losses from the decline. A miserable 2022. Small company stocks were slower to rise, but managed to erase most of last year’s losses. The Russell 2000 Index ended 2022 with a 21.6% drop, and 2023 with a 15.1% rise.
“The recovery is supported by increased participation assuming lower interest rates and signs of a soft landing scenario,” Adam Turnquist, chief technical strategist at LPL Financial, said in a research note earlier this month.
The rise could continue, he added. “If you filter out record highs that have occurred at least three-monthly over the past 100 years, the upward momentum has continued historically,” he said.
Magnificent 7
Overall market gains were primarily driven by the so-called Magnificent Seven companies, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. They accounted for about two-thirds of the S&P 500’s gains this year, according to S&P Dow Jones Indices. Nvidia led the group with an increase of about 239%.
U.S. investors entered this year hoping that inflation would ease further as the Federal Reserve raised interest rates. The trade-off would be a weak economy, perhaps a recession. However, although inflation has fallen to around 3%, the economy is performing well thanks to strong consumer spending and a healthy job market.
Stock markets are now betting that the Fed can achieve a “soft landing” in which the economy slows enough to quell high inflation, but not enough to tip it into recession. As a result, investors are now expecting the Fed to begin cutting interest rates as early as March.
If the Fed signals three times that it will cut its benchmark interest rate by three-quarters of a percentage point next year, the broader market could gain further momentum in 2024. The interest rate is currently at its highest level in 20 years, between 5.25% and 5.50%. .
High interest rates and Treasury yields negatively impact investment prices, so a continued reversal would mean further relief from that pressure. Wall Street expects even stronger corporate earnings growth next year after a largely lackluster 2023 as companies struggle with rising input costs, labor costs and shifts in consumer spending.
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