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Last year, 2023, was the year that defied all odds. At the end of 2022, nearly every expert at the major banks predicted a recession and/or bear market in 2023. And yet, despite some volatility and selling over the summer, markets logged a largely positive year.
Of course, that doesn’t mean it was a good year across the board. Here’s a look at some of the biggest winners and losers in 2023, plus a few investments that sat somewhere in the middle. Let’s start with the losers.
Investment losers in 2023
Banks
The banking sector never recovered following the collapse of regional banks kicked off by Silicon Valley Bank in March. Traditionally, financial firms benefit from higher interest rates, but in 2023, many banks saw large losses in the “hold to maturity” long-term bond portfolios. This triggered a domino effect that damaged their creditability in the eyes of their customers, who pulled their deposits, as well as investors. The banking sector was down more than 10% at the end of the year.
Commercial real estate
Public REITs experienced double-digit declines driven by rapidly increasing interest rates and continued pressure on office space thanks to ongoing remote-work arrangements. Many private REITs struggled with liquidity gates, making it hard for investors to exit their positions.
Dividend-paying stocks
Dividend paying stocks – including shares of well-regarded, fundamentally strong companies – were rejected en masse by investors. In the high-rate environment of 2023, we saw value-conscious investors favor the 5%+ return paid by cash equivalents over the roughly 2% return offered by dividend stocks. Interestingly, value stocks that paid no dividend massively outperformed those that paid above-average dividends.
Bonds
While bonds recovered at the tail end of the year thanks to signals that the Federal Reserve may cut rates in 2024, the Bloomberg U.S. Aggregate Bond Index saw a lot of volatility throughout 2023 and spent most of the fall in the red. (Long-term bonds, which are more sensitive to interest rates, have been slower to recover and were still in the red, but trending upward, in early December 2023.)
Small-cap stocks
The Russell 2000 Index, which measures small-cap U.S. stocks, spent more than half of the year in the red thanks to concerns about leverage and debt. High interest rates and rising labor costs have squeezed margins in smaller companies, exacerbating further investor angst.
Oil and energy stocks
Oil fluctuated significantly throughout the year, peaking in September before falling steadily through December. It looks like we’ll end 2023 about 10% lower than we started, as far as crude prices are concerned, due to an ongoing war in Ukraine and the outbreak of war in the Middle East during the fourth quarter. As you might expect, energy stocks reflected the overall moves in oil.
Neutral investments in 2023
The U.S. dollar
Despite a lot of conversations around inflation and its status as the global reserve currency, the dollar was mostly unchanged against other world currencies this year. It weakened slightly versus the Mexican peso and strengthened versus the Japanese yen, but overall, nothing major to report on the currencies front. This is something we’ll watch in 2024 as we see foreign countries signal they’ll purchase less U.S. debt going forward.
Gold
Usually, gold prices jump significantly during economic uncertainty and/or inflation. While we did see strong consumer demand, as well as central bank purchases, gold prices didn’t increase all that dramatically, with gains in the single digits.
Winning investments in 2023
Artificial intelligence
The biggest stock story of the year was the broad market recognition of artificial intelligence as an investment theme. This is largely thanks to ChatGPT, one of the first pieces of AI that was available to the public and easy to use. This accessibility drove mass usage, which in turn highlighted the potential of AI to boost productivity and otherwise impact markets and the economy.
Large-cap stocks
The so-called "Magnificent Seven" – Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla – were undisputed victors in 2023. These companies not only benefited from their early investments in artificial intelligence, they also helped drive the S&P 500 higher, since the index is weighted by market cap.
Private credit
Banks tightened lending standards following the regional bank crisis in March, causing a surge in demand for private loans. Most of that demand came from middle-market companies – firms that earn between $10 million to $1 billion annually. Private credit markets didn’t just benefit from higher demand, either. Higher variable loan rates and stronger covenants helped, too.
Cash equivalents
Cash equivalents, specifically money-market funds, offered rates in excess of 5% for most of the year, thanks to higher rates as the Fed battled inflation. Investors shifted trillions of dollars into these safer, more liquid instruments.
Private equity
Normally, when we see a slowdown in IPOs and M&A, we see a corresponding decline in private equity. This year, however, we saw private equity buck the trend and spend most of the year up by high single-, or even double-digits.
What this means for 2024
As many of us recover from the holiday season, the markets spent most of November and early December signaling major rebounds. While it’s common for stocks to rally in December (the so-called “Santa Claus rally”), we saw even more optimism this year thanks to signals that the Fed may cut rates as many as four times in 2024.
Going forward, remember: The markets love predictability, and we’re heading into an election year. Between U.S. politics and conflicts abroad, we could see significantly more uncertainty in the year ahead.
Kelly Milligan co-founded Quorum Private Wealth (www.quorumpw.com) with one goal in mind: to put clients’ interests first. Their fully independent platform brings clients the most competitive financial tools available across the broadest set of solution providers. Prior to founding Quorum Private Wealth Kelly spent 22 years with Merrill Lynch Wealth Management. He was named to the Forbes “Best-in-State” Wealth Advisor list in 2018, 2019, 2020, 2021 and 2023. He holds a number of professional designations including Certified Private Wealth Advisor® (CPWA®), Chartered Retirement Planning Counselor℠ (CRPC®), Certified 401(k) Professional, (C(k)P®™), and Certified Plan Fiduciary Advisor, (CPFA). He earned his Juris Doctorate and masters in business administration from UCLA and a BA in Economics from UC Berkeley.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.