Investors have much to celebrate as 2023 comes to a close, with the S&P 500 ending the year with a gain of more than 24% and the Dow Jones finishing near an all-time high. Reducing inflation, a resilient economy and the prospect of lower interest rates encouraged investors, particularly in the last two months of the year.
The benchmark S&P 500 index was down slightly on Friday, the last trading day of 2023, but ended the year with a 24.2% gain. The Dow Jones Industrial Average is up more than 13% this year and the Nasdaq has soared 43%, boosted by gains from big tech companies including Nvidia, Amazon and Microsoft.
The rally that began in November helped broaden gains within the market beyond the big technology companies. Investors were also encouraged by a December forecast from the Federal Reserve that plans to reduce interest rates three times in 2024.
The rally marked a big psychological shift for investors, said Quincy Krosby, chief global strategist at LPL Financial.
"Investors were able to accept the fact that the market would close the year on a bullish note," Krosby said. "Above all, it was broad market participation that reinforced and confirmed that gains in smaller company stocks were especially important."
Most major indices were able to erase their losses in a gloomy 2022. Shares of smaller companies made a late rally but managed to erase most of their losses from last year. The Russell 2000 index ended 2023 with a 15.1% gain after falling 21.6% in 2022.
"Broadening participation based on falling interest rates and signs of a soft landing scenario have underpinned the recovery," Adam Turnquist, chief technical strategist at LPL Financial, said in a research note earlier this year. month.
The rally is likely to continue, he added. "Over the last 100 years, and filtering out all-time highs that occurred at least three months apart, bullish momentum has historically continued," she noted.
The magnificent 7
The broader market's gains were largely driven by the so-called Magnificent 7 companies, which include Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla. They accounted for about two-thirds of the S&P 500's gains this year, according to S&P Dow Jones Indices. Nvidia leads the pack with a gain of around 239%.
Investors in the United States began the year expecting inflation to decline further as the Federal Reserve raised interest rates. The offset would be a weaker economy and possibly a recession. But while inflation has slowed to around 3%, the economy has advanced thanks to strong consumer spending and a healthy labor market.
The stock market is now betting that the Federal Reserve can achieve a "soft landing," where the economy slows enough to quell high inflation, but not so much that it falls into a recession. As a result, investors now expect the Federal Reserve to begin cutting rates as early as March.
The Fed's signal that it will make three quarter-point cuts to the benchmark rate next year could add more fuel to the broader market's momentum in 2024. That rate is currently at its highest level, between 5 .25% and 5.50%, in two decades. .
High interest rates and Treasury yields hurt investment prices, so a continued reversal means further relief from that pressure. Wall Street forecasts stronger corporate profit growth next year after a largely lackluster 2023, with companies struggling with higher input and labor costs and a shift in consumer spending.
