November and December produced large gains in the S&P500 bringing Q4 2023 returns to 11.69%. As such, the index posted gains in all four quarters during 2023. It’s worthwhile to note that the S&P 500 equal weighted index was up roughly half as much (13.87% for 2023) as the capitalization weighted index. This was primarily due to the “Magnificent 7” stocks (Amazon,Apple, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla) which were up anywhere from 49% to 240%. As a group they amounted to roughly three quarters of the S&P 500 total gains. The top 10 stocks accounted for 90% of the S&P’s return. This just illustrates how little breadth we’ve seen which could make further rallies more difficult.
Markets began to turn early in the quarter as economic data began to improve. Surprise upside earnings releases also helped spur gains. Both equities and bonds rallied as data pointed toward a 0.75% reduction in the Fed Funds rate in 2024. Fed Funds futures suggested up to six rate cuts during 2024.Regardless of how many rate cuts there are, inflation indicators definitely eased during the quarter. For example, the Feds preferred measure of inflation,the core Personal Consumption Expenditures index, dropped to a 1.9% annualized rate during the quarter.
In general business conditions strengthened, reducing the persistent recessionary worries. Real gross domestic product grew at nearly a 5% annualized rate. This was the highest level in 2 years. Also, the latest consumer price index level of 3.1% further highlights improvement in this measure of inflation. Finally, unemployment of 3.7% coupled with solid jobs growth are indicative of strong economic growth. The data as it stands now seems to point toward a soft landing where the economy and job market grow at just the right pace and inflation remains low and stable.
The markets had a very strong November and December, rising with very few pullbacks. Typically, this type of market action is detrimental to our counter-trend model but very advantageous to our hybrid momentum model. This was indeed the case as the former posted a negative return while the latter posted a positive return. In fact, our Q4 counter-trend returns represented approximately the entire loss in that model for the year. As was the case with the third quarter, our relative value model posted strong Q4 results as volatility continued to fall. Overall, our diversified portfolio was roughly flat for the quarter but posted a solid return of just over 9% for the year.