Through 9 months of 2023, the stock market was more-or-less stuck in the mire that bogged it down during the summer of 2022. We were in a bear market (another name for a market that’s significantly off its peak value) for well over a year, which is a relatively long time from a historical perspective. Inflation and high interest rates weighed heavily on investors’ minds.
The prevailing thought was that persistently high interest rates would grind our economy into a recession. The Federal Reserve, which sets the interest rate environment, had little choice. Inflation was high and the only way to bring it down was to use their most effective tool, which is raising rates. Raising rates curbs spending by both consumers and corporations. Less spending equals less inflation. However, less spending ALSO means fewer jobs and a slowing economy.
So here we were… the Fed had to raise rates or our dollar would continue to lose value. It had little choice, even though that would be putting the economy at a serious risk of a recession.
As the stock market in general is forward-looking, investors started to predict such a recession. They generally sold stocks and piled their cash into money markets, which now paid higher interest than they have in over 20 years. The market slowly retreated through the second half of 2022, and just didn’t budge for most of 2023.
There were bright spots. Artificial Intelligence seemed to offer untold benefits that could make companies more efficient and advertising more intuitive. Stocks of NVIDIA (they make the microchips needed for AI) and Microsoft (they made the first real release of an AI search engine) took off. Actually, if it weren’t for these and a few other stocks, the market drop would have looked much worse than it
did. As a matter of fact, a group of just a few stocks were doing so well that the entire market slowly worked its way forward throughout the summer, before falling again at the end of the season.
2023 chugged along much like 2022 ended and things looked to be relatively stagnant until we started getting surprisingly good news on inflation. The higher interest rates, along with improved post-Covid supply chains, helped inflation begin to turn around. Not only did inflation turn around, and start to head back down, the economy kept chugging along at a solid pace. As the summer turned toward fall, pessimistic views of a recession began to change.
The market began a dramatic turnaround. If somehow we could stem inflation and not send the economy into a full-blown recession, that would be a victory that very few people expected. On October 26th, the S&P 500 sat at 4,117. One week later it was at 4,358. By December the index had eclipsed its 52-week high and was steaming for a record. When news began to circulate that we might actually see a curb on inflation, lower rates, and dodge a recession, the market changed the entire narrative in 60 days.
Let this past year be a valuable lesson on the market and how it’s always trying to look forward. We still have a bit of an inflation problem. Interest rates are still higher than they’ve been for two decades. The market has raced higher at a breathtaking pace, not because of anything that has necessarily happened today, but in anticipation of what may happen in the future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.