Stock markets soared in the final quarter of 2023 as evidence gathered that the economy was not in recessionary territory despite the Federal Reserve's interest rate hike campaign. At the same time, analysts point to an AI-driven frenzy on Wall Street comparable to the dot-com boom of the late 1990s, as investors sought to capitalize on the transformative benefits of the early internet.
The S&P 500's surge is a welcome sign for the millions of Americans who invest in it through their retirement accounts. In 2022, investors held about $5.7 trillion in assets passively tracking the S&P 500 index and an additional $5.7 trillion in funds that use the index as a benchmark comparison, according to S&P Global.
Voter sentiment on the stock market and the economy could influence the 2024 election, as President Biden and presumptive challenger Donald Trump each have to defend their economic records. Trump predicted that the market would crash if he didn't win. Biden is already facing attacks from the right over inflation and gas prices, but his office insists he is in control and points to a strong job market.
The economic situation finally improves and consumer sentiment soars
Led by technology companies, including several names closely associated with artificial intelligence research S&P500 rose. Seven of the largest tech stocks, known as the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta), rose an average of 75% in 2023, leading to the same index at the end of 2023. accounted for 30% of the market capitalization. .
“AI is the new dot com,” said Michael Farr of Farr, Miller & Washington. “It's a new magic that will change the world, but we don't really understand it yet. But we all understand that it's very powerful.”
These seven stocks accounted for about half of the S&P 500's growth last year. Nvidia, whose high-performance chips are popular for AI applications, had its best year yet, gaining a valuation of nearly $190 billion, up 24% overnight.
Stock market soars heading into 2024, shaking off recession concerns
Ross Mayfield, an investment strategy analyst at Baird & Company, said the surge in value for Big Tech stocks followed a slump in the industry in 2022. He said investors can expect the sector to be “strong, but not great” in 2024.
“There was concern that the bull market earlier this year was too narrow and based on AI enthusiasm rather than solid fundamentals,” Mayfield said. “That has calmed down somewhat in recent months. Leadership is starting to emerge from more cyclical and economically linked stocks, and the market is expanding.”
Other stock indexes are also soaring, with the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index breaking their own records in early December.
While other markets have lagged behind Big Tech, analysts say encouraging economic data in recent months has increased optimism about the overall economy.
Everyone expected a recession. The Fed and the White House have found a way out.
In early 2023, Goldman Sachs predicted a 35 percent chance of a recession, beating the much higher consensus estimate of 65 percent.
However, a recession has not yet materialized. By November, when the S&P 500's latest rally began, Goldman declared the economy “on the final downhill slope” toward a soft landing and lowered its probability forecast to 15%.
“Hard Landing has become a fictional Netflix documentary,” said Dan Ives, senior analyst at Wedbush Securities.
Wayne Wicker, an asset manager at Mission Square Retirement, said the future path of the stock market depends largely on the Fed's continued approach to interest rates, with many investors anticipating a rate cut as early as March. He said he was looking forward to it.
“The only thing that's contributing a little bit to the uncertainty that we've seen over the past few weeks is, 'What is the Fed going to do about inflation?'” Wicker said. “The key objective is whether the market correctly believes that the Fed will start cutting rates in March, or whether it will wait until later in the year.”
The last rate hike was in July, and the central bank kept rates unchanged at its last meeting of the year, with Fed Chairman Jerome H. Powell indicating that officials “generally think we're at or near that point in raising rates.” . [the final level]He said further rate hikes were “unlikely”.
Analysts are now seeing signs of economic resilience. Inflation fell to 3.1% in November, well below its June 2022 peak and closer to the Fed's 2% target. The number of people seeking first-time unemployment insurance claims was 202,000 as of Dec. 14, down 19,000 from the previous week, according to preliminary estimates from the Labor Department. Personal consumption also remained steady, increasing by 0.2% in October.
The S&P 500's path to Friday's close wasn't entirely smooth. The major stock indexes appeared to have plateaued in the last few weeks of the year, with the S&P 500 repeatedly stumbling as it neared a record. Farr, a D.C.-based investment adviser, noted that many funds and investment advisers tend to reallocate their portfolios at the beginning or end of the year. He also said that surpassing new stock market records requires overcoming some level of anxiety.
“Someone has to pay a price that no one has ever paid before,” Farr said. “Once you get past that point, you'll be convinced that the downside you feared won't actually happen, and your emotions will rebound until you move forward.”