December 2023 - Market Update

Data Dashboard

Stock Market

The US stock market advanced in December across all sectors, led by Real Estate stock. Real Estate had been mostly flat through November, and benefitted tremendously in December from the quick decline in intermediate-term interest rates. The energy sector felt the pressure of lower oil prices, which fell for the third consecutive month.

Small and Mid-Cap US stocks outperformed in December, returning 12.2% and 8.7% respectively. Developed International stocks also outperformed US Large Cap, driven primarily by Japan and Australia. Emerging Markets stocks increased ~3.2% in December, dragged down by Chinese stocks. China’s Real Estate market has weighed heavily on the economy, and Chinese stocks declined 11% in 2023.

Some of the biggest contributors to the US Large-cap returns in December were Broadcom, NVIDIA, and Meta. Broadcom returned 21% in December on the back of the AI boom. Many of the top tech companies are looking to capitalize on AI, with Microsoft pushing their Copilot service and others pushing their own versions of large language model (LLM) enabled products.

December Monthly Returns (by US Sector)

Bond Market

US Treasury yields dropped again in December, bringing the 10-year yield to 3.88%. The US Aggregate Bond index is still down 10% from the peak value, but declining rates will help ease the pressure on bond investors.

Futures markets are now pricing in the first rate cut by the Fed as early as March, with the Fed Funds rate down to 3.5% by the end of 2024. This projection is aggressive, and implies either a significant reduction in inflation and a near-perfect landing, or a slowdown in economic activity that would warrant supportive action. It seems more likely that we will not see the first rate cut until at least June, leading to a milder pace of normalization.

Corporate bond spreads tightened further in December, as default risks declined. Lower yields are beneficial to corporate borrowers, especially high-yield borrowers who already have elevated funding costs. Investors are only getting paid an additional 3.23% on average to buy riskier debt vs treasuries, while earlier in the year investors demanded as much as 5.16% in additional yield to take on that risk.

Economics

The economic picture in the US remained fairly positive in December. The Unemployment Rate declined to 3.7%, and the November inflation read either held steady or declined, depending on which gauge you reference (CPI or PCE). Core CPI (excluding Food and Energy) now stands at 4% annually, while Core PCE (the Fed’s preferred inflation gauge) declined to 3.2%.

We are keeping an eye on the housing market as an indicator of the effects of high interest rates. Mortgage rates topped out at 8.09% back in October (National Average), and have since declined to 6.99% at year-end. We don’t yet have the report on US housing prices for Nov and Dec, but it is expected that the price of existing homes will increase. It is worth noting that the volume of houses sold has been declining steadily since March, as both demand and supply retract. The reduction in supply has been the counteracting force to the effects of higher mortgage rates on home prices.

December Economic Dashboard

Tactical Trades

For our Tactical Equity Stocks, our highest weights include Technology, Consumer Discretionary, and Financials. We are underweight Energy and Utilities. As for Tactical Equity ETF portfolios, we sold our foreign stock positions and allocated to Biotech, Homebuilders, and Regional Banks.

For our Tactical Fixed Income portfolio, our exposure remains a mix of intermediate-term bonds, Emerging Market bonds, and shorter-term High Yield.

General Client Considerations

IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) increase in 2024 from $22,500 to $23,000. Changing your elections at the start of this year can help you to spread out contributions evenly and ultimately maximize your tax advantaged retirement saving. If you are participating in a company sponsored retirement plan and maxing out your contribution, please reach out to your HR department to ensure your contribution amount has been updated to reflect the new maximums.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has remained the same at $7,500. Beginning in 2024, if you are born in 1974 or earlier, you can contribute up to $30,500 to these accounts in 2024. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team

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