ENDING THE YEAR ON A HIGH NOTE

What a difference three months can make. Markets started a downward slide late in the third quarter, stumbling as interest rates climbed to levels last seen in early 2001.1 By October, we had given up a good chunk of our yearly gains and the overall mood was sour. Various factors contributed to the negative sentiment. Inflation, which had ticked steadily down most of the year, began to come back up.2 Violence between Israel and Hamas also created turbulence for markets early in the fourth quarter, due to concern that oil supplies might be disrupted if the conflict spread beyond Israel and throughout the region. We also learned that third-quarter gross domestic product (GDP) grew by an astonishing 5.2% annualized rate, significantly higher than the second-quarter growth of 2.1%.3 The job market also remained strong. While this all may seem like good news, the positive data pointed to the possibility that the Fed might need to raise rates even more. Markets dropped in response, and October lived up to its historically gloomy tradition.4 However, signs of new life starting popping up before the month was out. The yield on the benchmark 10-year Treasury note, which briefly touched 5%, fell after it became clear the Israel-Hamas conflict was fairly contained and oil prices stabilized.5 New data also showed inflation was headed back in the right direction. The Consumer Price Index (CPI) dropped to 3.1% in November.6 The job market also started to soften, a sign that the economy was starting to slow somewhat. Renewed talk about a potential “soft landing” and avoidance of a recession began to circulate, along with hopes for possible rate cuts.7 This “Goldilocks” scenario — where the Fed doesn’t burn too fast or too slow but just right — combined with the holiday shopping season to propel markets to 2023 highs as November turned to December. Markets continued to rally through the last quarter, with the S&P 500 finishing up over 20% and the Nasdaq growing by 40% for the year.8,9 The Dow Jones also added more than 10% in 2023, and the yield on the 10-year Treasury note dropped back to around 4%.10,11

Source:
https://www.morningstar.com/indexes/spi
https://www.morningstar.com/indexes/xnas
https://www.morningstar.com/indexes/dji
Accessed Jan. 2, 2024

After a rough start, markets ended the fourth quarter of 2023 on an upward swing. We’ll enter 2024 with much more momentum and positivity than we did last year.

A NEW TUNE FOR 2024

While we started 2023 with the specter of a looming recession, the overall mood has shifted over the past 12 months and momentum is positive as we head into a new year. So far, we have dodged economic fallout resulting from the Israel-Hamas conflict, resulting in lower oil and gas prices. Declining energy costs are good for producers and consumers alike; when prices fall, manufacturers can lower prices because transportation costs are lower. And when prices are lower, consumers can stretch their dollars further. Inflation rates are slowly inching their way down, and the Fed has stopped raising interest rates. In fact, following their December meeting, Fed Chair Jerome Powell indicated three possible rate cuts
for 2024.12

The tricky part will be for the Fed to find balance between keeping rates too high for too long and cutting them too quickly. A mistake on either side of the equation could send us into a recession. Potential headwinds also linger as we usher in the new year. The impact of geopolitical events — such as the conflicts in Israel and Ukraine — will continue to be hot points of discussion, especially if Congress explores more financial support for any of the involved parties. It’s also a presidential election year in the U.S., and politics will likely play into market sentiment as candidates try to hit the right notes with voters.

STRIKING THE RIGHT CHORDS

Patience and persistence have paid off for investors in 2023. Asset allocation made sense again, and investors had many more options than they did in the previous few years. Best of all, markets are carrying positive upward momentum into the first quarter of the new year. Still, this is not a time to become complacent with your investments. We recommend reviewing your investments with your advisor and rebalancing your portfolio as needed to realign with your goals. As always, being deliberate and disciplined with your investing will likely yield the best long-term results, no matter what unknown events and challenges lie ahead.

SOURCES
1 FRED Economic Data. “Federal Funds Effective Rate.” https://fred.stlouisfed.org/series/FEDFUNDS. Accessed Dec. 14,
2023.

2 Trading Economics. “United States Inflation Rate.” https://tradingeconomics.com/united-states/inflation-cpi. Accessed
Dec. 14, 2023.

3 Bureau of Economic Analysis. Nov. 29, 2023. “Gross Domestic Product.” https://www.bea.gov/data/gdp/gross-domesticproduct. Accessed Dec. 14, 2023.

4 Connor Smith. Barron’s. Oct. 31, 2023. “October Has Been a Scary Month for Stocks.” https://www.barrons.com/livecoverage/stock-market-today-103123/card/october-has-been-a-scary-month-for-stocks-LS7G4jVjqf2qEPpGLNyk.
Accessed Dec. 14, 2023.

5 CNBC. “U.S. 10-Year Treasury.” https://www.cnbc.com/quotes/US10Y. Accessed Dec. 14, 2023.

6 Bureau of Labor Statistics. Dec. 12, 2023. “Consumer Price Index – November 2023.” https://www.bls.gov/news.release/ pdf/cpi.pdf. Accessed Dec. 14, 2023.

7 Howard Schneider. Reuters. Dec. 1, 2023. “Powell says Fed to move ‘carefully’ on interest rates, ‘soft landing’ taking shape.” https://www.reuters.com/business/finance/powell-says-fed-move-carefully-interest-rates-with-risks-morebalanced-2023-12-01/. Accessed Dec. 14, 2023.

8 Morningstar. “S&P 500 PR.” https://www.morningstar.com/indexes/spi/spx/quote. Accessed Dec. 14, 2023.

9 Morningstar. “NASDAQ Composite PR USD.” https://www.morningstar.com/indexes/xnas/@cco/quote. Accessed Dec. 14, 2023.

10 Morningstar. “DJ Industrial Average PR USD.” https://www.morningstar.com/indexes/dji/!dji/quote. Accessed Dec. 14, 2023.

11 CNBC. “U.S. 10-Year Treasury.” https://www.cnbc.com/quotes/US10Y. Accessed Dec. 14, 2023. 12 Neil Irwin and Courtenay Brown. Axios. Dec. 13, 2023. “Fed leaves interest rates unchanged, signals cuts ahead next year.” https://www.axios.com/2023/12/13/federal-reserve-interest-rates-meeting-decision. Accessed Dec. 14, 2023.

The opinions in the preceding commentary are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk, including the loss of principal, and there are no guarantees. AE Wealth Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.

The advisory firm providing you this report is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and advisory firm are not affiliated companies.

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