Quarterly Perspectives

January 1, 2024

Last year finished on a bright note with equity and fixed income markets registering exceptionally strong returns in the fourth quarter. Stocks were lifted by resilient economic activity in the U.S., resumption of growth in corporate profits and a fall in interest rates. The significant decline in yields during the final three months of the year underpinned sizable returns for fixed-income investments. The U.S. economy defied expectations of a slowdown last year while growth in many major foreign economies stalled. In the period ahead, the lagged impact of substantial Federal Reserve rate increases, lackluster activity overseas, and heightened geopolitical tensions could present near-term challenges for financial markets, but the long-term investment outlook is promising.

The Economic Year in Review

Growth in the U.S. economy remained healthy through all of 2023, despite a forceful campaign by the Fed to tame inflation by dampening demand. There was good progress on the inflation front, with the Consumer Price Index increasing 3.1% at year-end compared with 6.5% when the year began. Consumer spending was robust through 2023, supported by strong job prospects and excess savings from pandemic stimulus. Unemployment finished the year at 3.7%, close to a seventy-year low, and job openings were relatively plentiful. By mid-year, wages were growing faster than inflation for the first time since early 2021, further bolstering consumers’ wherewithal to spend.

Higher interest rates have yet to weigh heavily on households, as most mortgages were refinanced when rates were near record lows. Similarly, many businesses secured loans when borrowing costs were muted, which has so far kept their interest expenses manageable and contributed to the better-than-expected earnings growth. Additionally, profits were lifted by well-timed cost management programs and resilient demand. Sizable government outlays, including lingering pandemic stimulus and several substantial deficit spending programs, helped support growth last year. However, industrial output and service sector activity was modest for much of the year, signaling potential frailty for the U.S. economy. Overseas, economic conditions were less constructive than in the U.S. European economies were stagnant on average and the largest member of the union, Germany, slipped into recession. China, a key engine of global growth in recent decades, faced a number of serious difficulties in 2023 that may mark a turning point for their previously fast-growing economy. The challenges include population decline, high youth unemployment, bursting of a debt-fueled property bubble and deflation. Unique amongst global economies, the U.S. achieved the notable feat of maintaining healthy growth with lower inflation.

The Outlook for 2024

In contrast to a year ago, most investors begin 2024 optimistic that the U.S. will evade the type of economic contraction that usually follows periods of sharp rate increases by the Fed. Indeed, aspects of consumer health appear solid. Household debt levels are relatively modest and net worth is at record highs, bolstered by gains in real estate and financial markets. The corporate sector also appears well positioned on average, with inventories low, balance sheets relatively sturdy and profit margins above the long-run average. Despite the current areas of strength, the rate of economic growth is likely to slow in the period ahead as signs of strain in the economy are gathering. Credit card balances have climbed to the highest level in decades and the cost to service that short-term debt is at a record. Consumer confidence is slipping and the unemployment rate, while still low, is climbing. History shows that monetary tightening, such as the Fed’s increase in interest rates from 0.25% to 5.50% over the past twenty-one months, can take up to two years to fully impact the economy. Over the next two years, 20% of corporate debt in the U.S. must be refinanced at higher rates. Household finances will be similarly buffeted by floating-rate loans or maturing debt that needs to be refinanced. Some key barometers of the economic outlook point to a recession ahead, including the inverted yield curve, the Conference Board’s Index of Leading Indicators, restrictive bank lending standards, and the Manufacturing Purchasing Managers Index. Government spending, which has provided a tailwind for growth since the pandemic, may be less supportive as budget worries come to the fore. International economic prospects are likely to remain challenged, offering limited contribution to global growth. The potential for headwinds suggests that investors may need to lower their economic expectations in 2024. However, should growth moderate, rate cuts from the Fed will limit the magnitude of any slowdown and provide a foundation for the global expansion that will follow.

Fixed Income

Bond portfolios finished the year with favorable re-turns, propelled by gains in the fourth quarter that more than offset losses registered earlier in the year. The ten-year U.S. Treasury note finished 2023 with a yield of 3.9%, precisely the same level at which it began the year. That minimal change understates bond market volatility that unfolded in the interim. Rates rose briskly through much of the year even as inflation steadily receded. The ten-year note’s yield touched a sixteen-year high of 5.0% in October, before falling rapidly, indicating bond investors were finally persuaded that the Fed’s campaign to quell inflation was completed. Short-term yields remain well above those on longer maturity issues, an unusual condition that tempts many to favor short maturities. However, bond investors that heavily emphasize short-term issues may forfeit the opportunity to lock in higher long-term rates as the yield curve normalizes. We extended the duration of client bond portfolios through 2023 to secure attractive yields prior to a fall in rates that is now underway. We continue to favor a shift to longer maturities in high-quality issues, expecting that a moderation in inflation and economic activity will prompt the Fed to cut rates this year, fostering favorable returns for fixed-income investments.


Stocks rallied vigorously in the fourth quarter, capping a year of sizable gains. The S&P 500 recorded a return of 11.7% for the final three months and 26.3% for all of 2023, among the strongest of global markets. The advance last year was characterized by very large gains in a small number of giant technology companies, though by the final months the rally broadened to include a more diverse selection of stocks. A version of the S&P Index that weights all 500 companies equally, rather than by market capitalization, was up less than half as much as the traditional index for the year, but the two tracked closely in the fourth quarter, underscoring wider representation in the market’s year-end surge. Resilient economic activity in the U.S. and the resulting boost to corporate profits was key to the gain in stock prices through the year. But in recent months, the fall in interest rates was the most important factor driving equity prices. Lower interest rates boost the value of future profits and enhance the appeal of equities relative to bonds.

Valuations for most stocks are near the long-run average and their multiples may expand further if inflation and interest rates trend down. The main risk to the current advances is a deterioration in the global economic backdrop. Stocks made significant progress in 2023 as inflation cooled and fears of a recession subsided. While higher interest rates have yet to meaningfully dampen demand, the economy will continue to absorb the lagged effects of monetary tightening in the quarters ahead. Stocks may be vulnerable to a temporary correction if the employment backdrop weakens, or if inflation fails to moderate further. In client equity portfolios, we have added to positions that offer defensive characteristics at attractive valuations in case of such a scenario. More broadly, client portfolios are well positioned to weather potential near-term volatility given our emphasis on high-quality, durable growth stocks with strong balance sheets, high returns and ample cash flow. Longer term, the investment outlook is bright, with trans-formative advancements such as artificial intelligence, precision medicine and electrification un-leashing the type of productivity potential that propels economic growth and living standards.