Market Update – December 29th, 2023

Author:  Joe Maas, CIO SPG Advisors LLC

Friday, December 29th, 2023

Financial Markets
As we close out 2023, markets performed much better than expected this year as inflation fell more quickly than expected and the economy has held up better than expected. As of close on Thursday, December 28th, the Nasdaq Composite has gained +6.1%, the S&P 500 has gained +4.7%, the Dow Jones Industrial Average has gained + 4.9%, and the Barclays Aggregate Bond Index has gained +3.3% in the month of December.

This puts this year’s gains at +44.2% for the Nasdaq Composite, +24.6% for the S&P 500, +13.8% for the Dow Jones, and +2.5% for the Barclays AGG as of close on Thursday, December 28th – much better than most had expected for 2023.

Market News

S&P 500 Near Record Highs, but the Significance of this May Be Deceptive. While the S&P 500 has gained nearly +25% year to date, its returns since reaching its all-time high in early 2022 have been lackluster. Although there is a possibility that the S&P may soon surpass its all-time high, achieving this beyond just a few percentage points would demand a continued surge in bullish sentiment — a sentiment that we are uncertain investors still possess.

From a mathematical standpoint, overcoming a loss requires a higher percentage gain to breakeven; the S&P 500’s decline of -19.4% in 2022 would need a subsequent gain of 24.13% – something the S&P 500 has gained in 2023. In the same train of thought, those who invested on the all-time high date of January 3rd, 2022, would have underperformed cash. A stock market breakthrough beyond current levels is certainly possible but will require robust breadth from buyers and is likely to entail a fair amount of turbulence throughout 2024.

Turnaround in REITs. Real estate investment trusts (REITs) and real estate stocks have unexpectedly thrived in recent months amidst a backdrop of higher interest rates, largely posting gains since October lows. Specifically, Vanguard’s VNQ Index rose by +8.4%, and the S&P 500 Real Estate Sector (XLRE) by +9.7% year to date as of December 28th. Despite this, both indexes remain down over -20% from their December 31st, 2021 highs. Amid a single-family home shortage and anticipated interest rate cuts next year, real estate might sustain its positive performance into the new year.

Case Shiller Home Price Index. In the latest Case Shiller Home Price Index, October home prices increased +0.6% month over month, accelerating at their fastest annual rate of the year of +4.77%. Cities with the highest annual gains in home prices were Detroit (+8.1% YoY), San Diego (+7.2%), and New York (+7.1%). Following a brief period of home price deflation across Case Shiller’s National Index this spring, home price appreciation, in many indexes, has approached a more historically normal annual rate near 4%.

Durable Goods. In November, durable goods orders posted a robust +5.4% monthly increase, well above the expected +1.5%. Excluding defense, new orders saw an even more impressive uptick of 6.5%. Leading this overall surge in orders was transportation equipment, with a monthly increase of $14.3 billion or 15.3%. Beyond just this month’s report, this data point is one of many suggesting the broader economic landscape may be approaching a soft-landing scenario rather than a conventional recession – an important observation as we form views on various sectors heading into 2024.

Ending 2023 With a Strong Labor Market. The labor market remains robust, supported by low initial claims data. In an environment with a historically low unemployment rate of 3.7% in November, the most recent initial claims figures for the week ending December 23rd reported 218,000 unemployment claims. Despite a minor upward trend in initial claims over the past summer, there have been no significant setbacks in the labor market due to the Federal Reserve’s rate hikes. In the coming days we’ll get more employment data for December, where the trend is expected to persist, showcasing a resilient and strong labor market.

Summary
As 2023 concludes, markets have outperformed expectations, with the Nasdaq Composite up +44.2%, S&P 500 +24.6%, Dow Jones +13.8%, and Barclays AGG +2.5% as of close on December 28th. Even though stocks have done well in 2023, many remain below their all-time highs still, requiring more bullish sentiment to propel above past highs. REITs have performed well this year as a result of a more recent rally, amid interest rate uncertainty, while the Case Shiller Home Price Index shows a stable housing market as well. Durable goods orders surged in November, hinting at a potential soft landing. The labor market remains robust, supported by low initial claims data in recent months.

We appreciate your continued trust.

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.