Looking Back at the Markets in December and Ahead to January 2024

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Markets rose last month, continuing November’s rally as interest rates pulled back even more on expectations of Fed rate cuts in 2024. Markets in the U.S. were up by mid-single digits, finishing a solid quarter and a very strong year. International markets were also up substantially for the month, quarter, and year. And while stocks were hot, even fixed income posted enough gains to close out the year in the black. 2023 ended with a bang.

Looking Back

Interest rates. The rally was, once again, due mainly to interest rates, which kept dropping in December. Better inflation numbers raised hopes the Fed would start cutting rates this year, and signs of slower but continued economic growth supported that idea. Between job growth moving closer to pre-pandemic levels, healthy consumer confidence and spending, and continued weakness in manufacturing, the economy seemed to be settling into a soft landing, which could keep pulling inflation downward. In response, the 10-year U.S. Treasury yield dropped back to levels last seen in August, driving markets higher.

Looking Ahead

Changing expectations. Looking forward, we may see a change in expectations in the new year. Markets have been choppy so far this month, and there is commentary suggesting that they may have gotten ahead of themselves. After a strong year-end, the seasonal factors can be less positive at the start of the year, which could be a headwind. In addition, the Fed may start pushing back on rate cut expectations, which would be another negative. Overall, in my view, conditions should remain positive in January, but perhaps somewhat less so than last month.

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