The S&P 500 (SP500) on Friday declined by 0.2% for 2023 to close at 4,769.83 points, posting gains in eight out of twelve months. Its accompanying SPDR S&P 500 Trust ETF (SPY) added 24.8% for the year.
After a particularly painful 2022, Wall Street’s benchmark gauge bounced back in stunning fashion this year to post its best annual performance since 2021. The rebound has been driven by several factors, but chief among them have been a return to growth stocks, a massive runup in technology names partly due to the craze around artificial intelligence (AI), and a long-awaited Federal Reserve dovish pivot that sets up interest rate cuts in 2024.
Some quick stats:
- In 2023, the S&P 500 (SP500) posted a five-day win streak once, a six-day win streak twice, and its best showing was an eight-day win streak from October 30 to November 7. Conversely, the index’s longest losing streak was five days from October 17 to 23.
- Turning to weekly win streaks, the benchmark gauge notched a three-week positive run twice, a five-week run once and a whopping nine-week run that started in early November and has extended into the the end of the year. On the other hand, the S&P 500 (SP500) posted a three-week losing streak twice and a four-week losing streak once.
- Looking at peaks and troughs, the index’s 2023 intraday low was 3,794.33 points on January 3, while its lowest closing level was 3,808.10 points on January 5. The S&P’s (SP500) 2023 intraday high was 4,793.30 points on December 28, while its highest closing level was 4,783.36 points also on the same day. The benchmark average’s all-time closing high was 4,796.56 points notched on January 3, 2022, while its record intraday peak was 4,818.62 points notched on the next day.
- The S&P 500’s (SP500) most positive month in 2023 was November, in which it advanced 8.92% for its best such showing since a 9.11% gain in July 2022. The S&P’s most negative month was September, in which it slipped 4.87% for its worst such performance since a 5.90% retreat in December 2022.
A Strong H1, A Three-Month Losing Streak, An Astonishing Rally
In 2022, Wall Street shed about 20% for its worst annual showing since the financial crisis in 2008, as sentiment took a hit from a war between Russia and Ukraine, surging inflation, the Fed embarking on its most aggressive policy tightening campaign in decades and subsequent worries that the rate hiking cycle would push the economy into recession.
Markets responded to the 2022 performance by staging a nearly 16% climb in H1 2023. That runup was largely led by investors pouring back into growth stocks, with a particular emphasis on megacap technology names. A craze around the capabilities of AI pushed firms such as Microsoft (MSFT) and especially Nvidia (NVDA) to new heights. The H1 advance was also boosted by data that showed inflation moderating to a steady advance from a relentless one in 2022, which boosted bets that the Fed would be be able to ease back on rate hikes.
Wall Street then proceeded to see some weakness, posting a three-month losing streak from August to October. That marked just the ninth time since 1928 that the S&P 500 (SP500) fell in each of those three months, with 1990 and 2016 the last two times that happened. The sell-off was due to a resurgence in inflation, the Fed signaling that rates would stay higher for longer, surging crude oil prices, an extended pullback in technology stocks, a major strike by the United Auto Workers against the “Detroit Three” carmakers, and a potential government shutdown.
Things came to a head at the end of October, with the S&P 500 (SP500) at that point sliding more than 10% below its 52-week closing high – a definition of a technical correction.
However, from that moment, things took a remarkable turn. Two extremely favorable inflation readings in October and November, along with a November Fed monetary policy committee meeting that was perceived as dovish, sparked a rally that ended up seeing the S&P 500 (SP500) notch one of its best Novembers on record. The Fed’s final meeting in December then cemented that rally as the central bank’s updated dot plot showed at least 75 basis points of rate cuts in 2024 and chair Jerome Powell’s comments suggested that the long-awaited dovish pivot was here.
Wall Street now ends 2023 near record levels, and the focus turns to what next year can bring.
Looking Ahead
A host of analysts and major brokerages have come out with bullish year-end 2024 targets for the S&P 500 (SP500), with many seeing the benchmark index scaling 5,000 points and some estimating a level as high as 5,400.
King Lip, chief strategist at BakerAvenue Wealth Management, believes that in 2024 small-caps will do better, possibly even more so than large-caps as the rate hiking cycle is over. Small-caps did lag Wall Street’s major averages in 2023, with the Russell 2000 (RTY) gaining 14.3% compared to the S&P 500’s (SP500) 23.8% climb. Lip also thinks that the healthcare sector – which has been a laggard this year – might be one of the leading ones next year due to it being one of the sectors with the highest earnings growth forecast.
“We think real estate may surprise to the upside due to lower rates. No one wants to touch commercial real estate investments, but we think the worst is behind the sector and the forecast for lower rates will benefit the sector. We think regional banks are also likely to have a strong rebound in 2024 as the balance sheets of Treasury bonds look better in a lower rate environment,” Lip told Seeking Alpha.
Looking at the market’s expectations surrounding interest rates, according to the CME FedWatch tool, traders are pricing in a nearly 75% chance that the Fed delivers a 25 basis point rate cut at its monetary policy meeting in March itself. The federal funds rate is at a current 22-year high of 5.25%-5.50%.
“Outlook for 2024: I expect a broadening bull market as the Fed pivots (at least initially) and the bond market finds a new range, while earnings advance and the economy survives the great hiking cycle of 2022-23,” Fidelity’s Jurrien Timmer said on X (formerly Twitter) last Friday.
“Two caveats: 1. The Fed might pivot prematurely, forcing it to repent its dovish narrative sometime in the second half. Giving back a few rate hikes makes sense — the market loves the idea, obviously— but for me, a hawkish pivot seems like a bigger risk than a hard landing,” Timmer said.
“(Second), at a forward P/E ratio of 20.8x, most of the soft-landing narrative may already be priced in. The forward P/E ratio has gained 5.5 points since its low of 15.3x in October 2022 in anticipation of an earnings recovery. That recovery is happening, but how much of it might be offset by multiple compression remains to be seen,” Timmer added.