The fourth quarter of the year had an uncomfortable start, giving way to November and December delivering strong returns, as encouraging economic data led to a dramatic shift in interest rate expectations. This, in turn, raised hopes of a soft landing and major indices finished the year with a flourish as the US Federal Reserve hinted at interest rates cuts as inflation levels in the US and UK declined to 3.1% and 3.9% respectively.
That is not to say that this has been a straightforward quarter or year for portfolio returns. Far from it. Most benchmarks have been hugely affected by the dominance of the so-called Magnificent Seven – named after the 1972 film. To provide context, the market capitalisations of Apple, Microsoft, Alphabet, NVidia, Amazon, Meta and Tesla now exceed that of the entire stock markets of the UK, Japan, China and France combined. This is reflected in the S&P 500 Index’s stellar capital return of 24.2% for the year whilst the Equally Weighted S&P 500, which removes this dominance, rose by a more modest 11.5%. Insufficient exposure to these behemoths will have stymied returns this year, although one should perhaps be mindful that in that film, only three of the protagonists survived.
It is often quipped that economists have predicted nine of the last five recessions, highlighting the dispiriting truth about economic forecasting. This has certainly been the case in 2023, which will be remembered as the year in which we left behind the near zero interest rate era and returned to a more normal environment. Nonetheless, a world of interest rates at 4% and inflation of 2-4% should perhaps be embraced, not feared.
These Magnificent Seven stocks have led to a ‘winner takes all’ environment to take hold in 2023 underlined by the utter dominance of Amazon, Microsoft and Alphabet in cloud computing or Apple’s iPhone. More widely, markets have been quick to brutally punish companies reporting any hint of deterioration in results or outlook which is likely to continue in 2024.
Excessively high government spending has continued in the UK where debt is almost 100% of GDP whilst America’s total debt stands at an astonishing $33.6tn, triple the level it was before the Global Financial Crisis in 2007. In common with so many Western governments, this unsustainable approach to public spending must be addressed.
In 2024 some 2 billion people in over 40 countries will be going to the polls in what will be a record-breaking year for elections, which will doubtless provide challenges. Nonetheless, the global economy has displayed remarkable resilience in 2023 – which suggests that there is every chance that the year ahead will be rewarding.
