Markets surprised to the upside in 2023, despite a host of challenges, and fought off a widely expected recession to finish the year near record highs. Looking ahead to 2024, the market rebound, combined with the Federal Reserve’s rate pause, has set the stage for a long-anticipated pivot toward rate cuts.

Stock and bond annual returns

Stock and bond annual returns since 1990.
Source: Clearnomics, Standard & Poor’s, Bloomberg, Principal Asset Management. Data as of December 28, 2023.

Despite many challenges—such as bank failures, cracks in China’s economy, war in the Middle East, and political battles in Washington—2023 was a strong year for both equities and fixed income. As of December 28, the S&P 500, Dow and Nasdaq have generated total returns of 26.6%, 16.2% and 45.5% year- to-date, respectively, while the Bloomberg U.S. Aggregate Index has gained 5.5%.

This robust performance can be largely attributed to a few notable factors:

  • A widely anticipated recession never occurred.
  • Inflation is showing broad signs of improvement.
  • The labor market remains resilient.
  • Enthusiasm for artificial intelligence drove technology stocks higher.

The strength of the broader economy is also feeding into investor optimism heading into the new year: 2023 GDP could reach 2.6% based on the Federal Reserve’s latest projections, headline inflation decelerated to 3.1% in November, and unemployment is only 3.7%. With markets expecting the Fed to cut rates by 150 basis points over the next twelve months, 2024 is setting up to be the year of the pivot.

Although rate cuts are indeed likely, there’s still reason for caution. A mild recession is still possible and may only justify a soft cutting cycle, especially if structural inflation is slow to improve. While investors can be grateful for the positive market returns in 2023, they should continue to stay diversified and focused on long run trends in the new year.

Macro views
Fixed income

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