Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

2023: The Year in Review

In many ways, 2023 was a remarkable year. Despite financial and geopolitical challenges and pervasively sour consumer sentiment, the US economy and the stock market ended the year far better than most observers expected or even hoped. Here’s a look back at a few of the key developments.

Fed gains the upper hand over inflation. A tip of the cap to Jerome Powell and his colleagues for lining up the US economy on approach for what looks loke a soft landing while taming the inflation monster.

An entire generation has now experienced inflation for the first time and didn’t much like it. The economic distortions of Covid including supply chain disruptions, shifts in spending and work patterns, and a boatload of financial stimulus pushed inflation to 9.1% in 2022, a rate not seen in over 40 years. The central bank at first believed the spike to be transitory, but inflation proved to be stubborn and once the Fed engaged, they confounded most of their critics. Raising benchmark interest rates 11 times, from 0.25% to 5.5%, was widely panned as too far too fast. Meanwhile, the most historically reliable forecasting tool, the relationship between short- and long-term interest rates called the yield curve, was screaming “recession”.

While it’s too early to declare complete victory, headline inflation is down from 6.5% to 3.1% so far this year, such remarkable progress that Wall Street is now anticipating rate cuts as early as March. That won’t happen, but we could certainly see 2 or 3 small reductions in the second half of 2025 if CPI falls below 2.5%. All in all, quite a performance.

US smashes records for oil and gas production. A persistent myth abides, namely that US oil and gas production has declined in recent years. In fact, America set a new record in 2023 for crude oil production, reaching over 13 million barrels per day during November, up 15% since 2021. The US is again the world’s largest producer, pumping 60% more oil and petroleum liquids than Saudi Arabia and double the output of Russia. In fact, domestic energy production is so robust that America became a net exporter of crude oil, selling 1.5 million barrels per day more oil than it imports.

The relentless increase in fossil fuel production has upset among some of the President’s supporters concerned about eroding progress on climate policy but has been welcome news for weary consumers at the gas pump with gas prices down 18% since the September peak.

Banking crisis averted. Three of the four largest bank failures in US history occurred in quick succession last March due in large part to poor risk management by bank executives who made losing bets on permanently low interest rates. This time around, however, regulators including the FDIC drew upon a bag of tricks developed during the great financial crisis to contain the contagion and protect the system. Many of us barely remember, which is a good sign.

Big Labor makes a comeback. The agreement between the UAW and the big three Detroit automakers marked the high point in a year of startling victories for organized labor. Following decades of faltering membership and dozens of corruption scandals, a new generation of union leadership employing more creative tactics is capitalizing on a growing sense of resentment among workers toward CEOs and executives.

According to Cornell University, 2023 saw 8 times as many strikes as in 2021 and 4 times the number last year. These actions have paid off for workers in big raises and job security gains rivaling the contracts of the 70s and 80s. Labor union representation has fallen from 34% of the work force in 1947 to 10% today and only 6% of private employment, presenting a fertile field for organizers. Meanwhile, public support for labor unions is up to 74%, suggesting the likelihood that more non-union shops will be targeted, particularly among the many auto plants in the US not subject to collective bargaining today.

Bulls run wild on Wall Street. Following a tough year in 2022, most analysts remained cautious moving into the new year amid higher interest rates and recession fears. In fact, the S&P 500 turned in a stellar performance, doubling its long-term average return. However, 2023 was also a tale of 2 distinct stock markets: a handful of huge mega-cap tech stocks, and everyone else.

The incredible buzz over artificial intelligence along with investor hopes for rate cuts sent the so-called “Magnificent 7” stocks on a tear, rising over 75% for the year and accounting for about ¾ of the entire gain for the broad market. According to Goldman Sachs, these 7 monsters now make up 30% of the S&P 500 index, the highest degree of concentration on record. They remain overvalued by historical measured against future earnings, but they also produced all the profit growth for 2023: without them, earnings for the other 493 companies declined by about 4%. This extreme imbalance has produced one of the most bizarre bull markets in memory, with a record 72% of stocks in the S&P underperforming the index for the year. This could set the stage for a broadening in participation, rewarding long-suffering value investors given the record level of cash holdings in money market funds, but most analysts remain bullish on the big guys despite their rich valuations.

What a year. Next week, an intrepid look ahead at 2024.

Happy New Year

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