Current market environment performance of dynamic, risk-managed investment solutions.
By Jason Teed
The final quarter of 2023 saw global equity markets riding a wave of optimism. Central to this was the growing belief that interest rates, which the Federal Reserve hiked to combat inflation, might soon be cut. The U.S. stock market exemplified this trend, as evidenced by surges in the major indexes such as the S&P 500. This year’s key factor has been the burgeoning interest in artificial intelligence (AI), which boosted tech-heavy growth stocks. Additionally, growth investment styles outshone value investment styles, reversing the trend from 2022 when higher rates and recession fears had given value stocks an edge.
Though they lagged behind the U.S., foreign markets also saw gains. Geopolitical tensions and China’s economic slowdown dampened Europe and Asia’s performance. Despite this, foreign developed markets outperformed emerging markets, buoyed by inflation being less severe than anticipated and the expectation that interest-rate cuts would follow in the wake of the U.S. Federal Reserve’s decisions.
The Technology and Real Estate sectors led the charge in the U.S. in the fourth quarter, benefiting from the anticipated rate cuts. Cyclical sectors, linked closely to the economy’s health, also outperformed in the U.S. equity market as stable economic growth became more likely than the near-universal recession projections with which the year began. In contrast, defensive sectors like Utilities and Consumer Defensive lagged, possibly due to their appeal in more uncertain economic times.
The bond market in Q4 2023 reflected the changing economic landscape. The Bloomberg Barclays U.S. Aggregate Bond Index, a bellwether for bonds, reported positive returns. Many attributed the shift to positive bond returns at the end of 2023 to decreasing inflation and expectations of rate cuts in the new year. In a reversal of the last year and a half, longer-duration bonds outperformed their shorter-duration counterparts, responding to the changing inflation outlook. Both high-yield and investment-grade corporate bonds saw significant positive returns, strengthened by the market’s inclination toward lower interest rates and a decreased risk of recession. Globally, bond markets echoed these sentiments, with Asian markets, for instance, benefiting from a weaker U.S. dollar and reduced oil prices, easing inflationary pressures.
Gold stood out in Q4 2023, hitting an all-time high in early December. The falling U.S. dollar primarily fueled this rally. The precious metal finished the year on a strong note, thanks to the dollar’s decline during the quarter, contrasting with the modestly negative returns for other commodities.
Several critical economic factors played a pivotal role in shaping Q4’s market dynamics. Moderating inflation in economies such as the U.S. and the United Kingdom raised hopes of ending aggressive interest-rate hikes, significantly impacting market movements. The Technology sector was a standout performer, riding high on AI enthusiasm. On the other hand, defensive sectors, which typically thrive in uncertain economic climates, found less favor. Varied economic challenges across regions influenced market performance. For instance, the resilience of the U.S. economy contrasted with China’s financial struggles and ongoing real estate crisis, which dampened investor sentiment toward Chinese stocks.
The fourth quarter of 2023 painted a picture of a financial landscape at a turning point. Equity markets, particularly in the U.S., celebrated the potential easing of monetary policy. Bonds reacted to changing inflation expectations, while gold capitalized on currency movements. The period highlighted the intricate interplay between economic fundamentals and market performance, offering valuable insights for investors and market watchers alike.
Performance trends for the quarter
About 91% of our strategies were profitable for the quarter amid market volatility. The top-performing strategies tended to be aggressive equity, which took advantage of upward movements in that class.
Tactical bond strategies mostly struggled for the quarter. While such strategies can falter when the bond market changes direction, they often perform well when markets consistently trend up or down.
Among our strategies available in multiple risk profiles, there was a pronounced positive correlation between risk and return. More aggressive strategies gained more for the quarter, taking advantage of market movements.