Markets in 2023 finished the year very differently from how they started it.
The FTSE All World Index in sterling terms ended the year up 22% offsetting 2022’s fall of 18% bringing index levels up to the highs of 2021. The strong performance however masked some big differences in country returns. The US ‘s S&P 500 was up 24.2%, the Nasdaq was up 43.4% while Chinese equities lost 12.5%.
Equity returns in 2023 were driven by the Magnificent Seven (Apple, Microsoft, Google, Nvidia, Meta , Amazon and Tesla) as excitement for the potential of Artificial Intelligence captured investor interest throughout the year. In December all the sectors rallied hard as investors started to believe that the US economy had landed softly.
Bonds which had been in negative territory most of the year moved into positive territory in December during the “Everything rally” as global inflation continued to come in lower than expected and the Fed dropped hints that rates had reached their peak and could even be cut in 2024. The S&P US Aggregate bond index was up 5.8% for the year while in the UK bonds were up 3.8% (FTSE UK Gilts all stocks index).
Commodities were weaker over the year which helped bring global inflation lower. The Broad CRB commodities index gave up 8% over the calendar year while oil fell 10%.. This helped the UK PM Rishi Sunak to declare that the government had reached their goal of bringing inflation to below 5% by year end.
Cash had its best year since before 2008 returning around 5% over 2023. Yes it was beaten by other asset classes but importantly it managed to keep up with inflation over the year and looks to do so again this year.
This year the markets will be looking to see if the soft landing scenario (in which inflation cools further without the need for a deep recession) plays out in the US. The markets do expect some rate cuts this year and any economic data that shows the resurgence of inflation and stronger growth will probably hurt equity and bond returns. The UK and Europe’s economies look much weaker and may not avoid recession.