North River Wealth - 4Q 2023 Market Update — North River Wealth Advisors

Market Recap

What will 2023 be best remembered for? Barbenheimer? (Editors note: we have not seen either movie). The meteoric rise of Taylor Swift? The mainstream use of Artificial Intelligence (AI)? Maybe all the above, but this is an investment and financial planning blog, so let’s cut to the chase.

What Recession?

The doom and gloom of double-digit declines across both stock and bond markets in 2022 led many industry pundits to forecast a recession for 2023 that never arrived. It’s one of the reasons we do not try to time the market or listen to the talking heads. No one can continuously predict what will happen in financial markets. Instead, markets defied the odds pushing forward despite rising interest rates and a lackluster third quarter, ultimately notching impressive double-digit gains across most equity markets.

Source: J.P. Morgan Asset Management¹

Market Returns

Large-cap US stocks, as measured by the S&P 500, returned 12% for the quarter, moving the year-end gain to 26%. The S&P 500 was mostly influenced by the impressive return of growth stocks (led by “The Magnificent Seven” of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) compared to value-oriented stocks. Large-cap growth stocks, returned nearly 43% on the year, while large-cap value stocks (typically dividend paying companies) returned only 11%.

Small-cap US stocks, represented by the Russell 2000, rebounded from a mostly stagnant year to increase 14% for the quarter, moving its year-to-date gain to 17%.

International markets also rebounded, with the MSCI EAFE (comprising developed Europe and Asia) improving 10% for the quarter and 19% year-to-date, primarily driven by strong returns in Japanese stocks. Emerging Markets stocks also moved into strong positive territory returning 8% and 10% over the same time periods as the Chinese economy showed some signs of life after struggling for most of the year.

After a very rough 2022 and poor start to 2023, bonds rebounded in the fourth quarter with a return of 7%, bringing the full year return to 6%. After a wild ride in 2023, the yield of the 10-year Treasury bond was unchanged from start to finish at 3.9%.

One of the things we were most excited about in the fourth quarter was that it was a broader market rally. We talked at length in previous updates about how concentrated this rally was and that we would need stronger returns from value-oriented stocks, smaller companies, and overseas markets. Check, check and check. Is this the start of a larger bull-market or are recession fears and a slowdown still in the air? Time will tell, but we are definitely encouraged about how we finished the year.

Rising, Now Falling Rates

The past few years in the bond market have been one of the wildest rides we have experienced in our lifetime. It’s no secret that bonds had an extremely difficult run in 2022 and for the majority of 2023.

After seven rate hikes in 2022 and four hikes in 2023, it appears that the cycle of the Fed increasing short-term interest rates is now behind us. Remember, the Fed is tasked with maximum employment and price stability. Typically, the Fed will raise interest rates to slow the economy and decrease demand for goods and services or as we saw in this cycle, to combat inflation. The pace and consistency of the rate hikes led to one of the worst years ever for the bond market in 2022.

But with news of the Fed’s rate hike cycle likely in the rearview mirror (the Fed is now expected to start cutting short-term interest rates in 2024), we saw a swift drop in yields (which is good for bonds, because it leads to an increase in prices or returns) which led November 2023 to be the best month for bonds since the mid-1980’s.

Another hot topic for the year was the significant rise in mortgage rates. Because mortgage rates are extremely tied to the trajectory of long-term interest rates, home buying became more difficult for first-time buyers. We did see mortgage rates move lower by year-end, but rates remain elevated compared to the past 20-years. Here is a good chart we found from our friends at Redfin about how much you can afford as mortgage rates change.

Source: Redfin²

Market Outlook

Our market outlook for 2024 will be out next week where we explore the potential effects of AI, interest rates and the upcoming election to name a few. We look forward to the opportunity to connect with you in this new year.

Cheers!

Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors. We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country. To learn more, contact us here.

This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.