Stocks went gangbusters in 2023, but hardly anyone saw it coming.
Many on Wall Street entered last year predicting more of the same after a terrible performance the previous year: Stocks and bonds fell in tandem in 2022, as the Federal Reserve aggressively hiked interest rates to tame inflation and recession worries grew. Big tech stocks in particular got hammered on expectations that higher rates would raise borrowing costs and eat into their profits.
In a surprise turnaround, stocks broke out from the get-go. A handful of tech stocks amassed such immense gains that they became known as the "Magnificent Seven." Investors shrugged off a regional banking crisis, debt ceiling worries and geopolitical tensions, albeit not without some short-term volatility in markets.
The S&P 500 index soared 24% last year, the Dow Jones Industrial Average gained 14% and the Nasdaq Composite popped a whopping 43%.
That's also despite spikes in bond yields, which common Wall Street wisdom says tends to whet investors' appetites for high-yielding cash over riskier assets like stocks. The S&P 500 ended 2023 with a nine-week rally, its longest streak of gains since January 2004.
Another fear never came to pass: Recession.
Economists and investors alike warned in 2022 that the economy could enter a recession by early 2023.
Instead, the labor market and broader economy stood strong even as rates reached their highest level in 22 years. So did consumer spending, as Americans opened up their pocketbooks for everything from summer travel to Taylor Swift's and Beyoncé's tours to holiday shopping.
Wall Street pushed recession bets further and further out, before experts from JPMorgan Chase to Bank of America scrapped their 2023 recession forecasts.
"The most widely anticipated recession in modern history that was supposed to happen in 2023 never happened," said Jamie Cox, managing partner at Harris Financial Group. Still, a recession isn't completely out of the cards for 2024.
Early last year, the collapse of several regional banks took markets by surprise, sending stocks tumbling and bond yields plunging. The turmoil also sparked worries that the Fed could over-tighten and tip the economy into a downturn.
"There is nothing like a banking crisis to instill fear in the market," wrote Adam Turnquist, chief technical strategist at LPL Financial, in a note on Tuesday.
Stocks recovered from that sell-off. Some investors expected the Fed to begin lowering rates, with the federal funds futures market pricing in several cuts for the latter half of 2023. But the central bank brought rates to their highest level in 22 years and held them there, as inflation trended lower but remained above the Fed's 2% target.
Rate cuts could come later this year. The Fed has penciled in three rate cuts for this year, according to their latest economic projections released last month. Chair Jerome Powell indicated in a press conference following the Fed's December policy meeting that the central bank is at or near the end of its current tightening cycle.
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