Market Review, Fourth Quarter of 2023.

After falling in September, the market turned upward at the start of October, only to fall sharply in the second half of the month. But earnings reports were generally good, as were economic indicators, and an increasing number of analysts suggested that US inflation might abate without a sharp economic downturn. A late-October reading on consumer prices supported this view, and a market rally began that lasted the rest of the year. Reinforcing this strength was the message from the Federal Open Market Committee’s mid-December meeting, which suggested that FOMC members considered inflation much improved (though still above their goal of a 2% annual rate) and further interest rate increases unlikely. Major market indices ended the year near peaks they had last established early in 2022, although much of the recovery in market-weighted indices was due to the performance of a few of the largest growth stocks, with the rest of the market lagging for most of the year, and only gathering strength during the year-end rally. The S&P 500 index returned +11.69% for the quarter (+26.29% for the year). The Mid-cap 400 index returned +11.67% for the quarter and +13.87% for the year, and the Small-cap 600 index +15.12% (quarter) and +16.05% (year). [Index returns: Standard and Poors]

Global markets also gained, with the MSCI EAFE international equity index returning +4.96% in local currencies. Indications that the Fed monetary stance may become less stringent reversed an earlier upward trend in the US dollar. It dropped to 140.92 yen, from 149.43 September 30. It also weakened against European currencies, ending the year at levels of $1.2743 to the pound Sterling and $1.1062 against the euro, from September 30 levels of $1.2214 and $1.0584, respectively. The overall currency effect boosted returns for US investors in foreign securities; EAFE returned +10.42% in US dollars (+18.24% for the full year). [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Hopes for easier monetary conditions also led to a strong bond market rally. The yield on the two-year US Treasury note ended the quarter at 4.23%, up from 5.03% at the end of September, and a bit lower than its year-earlier level of 4.41%. The ten-year yield fell to 3.88% from its September 30 level of 4.59%, to match its level of the end of 2022. The Bloomberg Barclays US Aggregate Bond index returned +6.82% for the quarter, and +5.53% for the year. [Index returns: Bloomberg; bond yields: US Treasury]