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4th Quarter 2023 Market Review

From First Trust Advisors L.P.

Sources: Bloomberg and Investment Company Institute and yCharts.


The S&P 500 Index (“Index”) closed December 2023 at 4,769.83, just 0.56% below its all-time closing high of 4,796.56 on 1/3/22, according to Bloomberg. As of 12/29/23, the S&P MidCap 400 and S&P SmallCap 600 Indices stood 4.44% and 10.08%, respectively, below their record closing highs. In December, the S&P 500 Index posted a total return of 4.53%. Ten of the eleven major sectors that comprise the index registered positive total returns for the month. The top-performer was Real Estate, up 8.70%, while the worst showing came from Energy which was down 0.08%. The S&P 500 Index posted a total return of 26.26% over the trailing 12-month period ended 12/29/23. Nine of the eleven major sectors were up on a total return basis. The index’s top performer was Information Technology, up 57.84%, while the worst showing came from Utilities which fell by 7.08%. Market breadth widened substantially in November and December, driven by expectations that the Fed would likely cut interest rates in the new year. In December, 416 of the companies that comprise the S&P 500 Index showed positive price performance for the month compared to just 148 in October. Likewise, the S&P MidCap 400 and S&P SmallCap 600 Indices saw positive price movement in 349 and 544 of their constituents, respectively, in December, compared to 77 and 136, respectively, in October.


The yield on the benchmark 10-year T-note closed trading on 12/29/23 at 3.88%, down 45 basis points (bps) from its 4.33% close on 11/30/23, according to Bloomberg. The 3.88% yield stood 157 bps above its 2.31% average for the 10-year period ended 12/29/23. Notably, after peaking at 4.99% on 10/19/23, the yield on the 10-year T-note plummeted by 111 bps, ending the year unchanged. Historically, an inverted yield curve (when short-term yields rise above long-term yields) has been a fairly accurate predictor of an impending recession. In fact, the 2/10 yield curve was inverted for six to twenty-four months before all but one U.S. recession between 1955 and 2018. For context, the yield on the 2-year T-note stood 37 bps higher than the yield on the 10-year T-note at the end of December. This marks 18 months in a row where the yield curve has remained inverted between these two benchmarks. As revealed in the “Fixed Income” section to the left, each of the fixed income indices we track posted positive total returns in December, as well as for the year. December’s performance comes on the heels of a decidedly dovish shift in tone from the Fed. Just a few short months after announcing rates may need to remain “higher for longer”, Fed officials revealed that they were likely to lower rates by 75 bps over the course of three cuts in 2024. Data from Bloomberg shows that investors expect the Fed may cut rates more dramatically than that. As of 12/29/23, Fed funds rate futures contracts were pricing in 158 bps of rate cuts in 2024.


The Fed’s recent revelation that it was targeting three rate cuts totaling 75 bps in 2024 sent the equity and fixed income markets surging in December. Both the NASDAQ and the Dow Jones Industrial Indices set all-time highs during the month. On 12/28/23, the S&P 500 Index closed within 14 points of its all-time high. The Bloomberg U.S. Aggregate Bond Index rose by 8.53% on a total return basis in November and December combined. That said, investors would be well served to watch the data closely. Inflation remains well-above the Fed’s stated target of 2.0%, and investors are pricing in significantly larger interest rate cuts than the Fed is forecasting.


Past performance is no guarantee of future results. Historical performance figures for the indices are for illustrative purposes only and not indicative of any actual investment. Indices are unmanaged and an investor cannot invest directly in an index.

Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information.

A professional adviser should be consulted before implementing any of the strategies or options presented.

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