2023 Fourth quarter market review

The final quarter of the year saw a rally in most asset classes and sectors, with both stocks and bonds increasing. The markets aggressively priced in an economic “soft-landing”, which impacted valuations across the board. 


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U.S. stocks ended the quarter with a forward price-to-earnings ratio close to 20, significantly higher than three months earlier. Bond yields increased significantly during the year, yet the fourth quarter's rally reduced the U.S. 10-year Treasury yield to 3.87%.

Economic data indicates that some aspects of the U.S. economy are more consistent with a recovery than a recession. Manufacturing activity, housing prices and the Conference Board’s Index of Leading Indicators are all positive signs. A recession is much less likely in 2024 than last year.

However, fourth-quarter market gains may have been excessive, and we could see some volatility in early 2024 as the markets assess whether their optimism at the end of 2023 was warranted.

Canadian equities

The S&P/TSX Composite Index increased by 7.25% for the fourth quarter, ending the year up by 8.12%. Nearly all sectors (except energy) posted gains for the quarter. The price of oil (WTI), which had hit its highest point within the quarter, closed out the period at US$71.65/bbl.

Information technology, which makes up 8.66% of the S&P/TSX Composite Index, led all sectors with returns of 23.9% for the quarter (68.8% for the year).

This quarter’s biggest contribution came from Shopify, gaining 39.14% and contributing to 17.11% of the S&P/TSX Composite Index's overall gain.

U.S. equities

The S&P 500 Index finished the quarter up 11.24% after retreating by 3.98% in October, with energy the only lagging sector. Real estate led the index with a gain of 17.7%, followed by information technology with a 16.9% gain.

Indications of the end of additional rate hikes from the U.S. Federal Reserve buoyed equity markets.

The Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) drove U.S. equities’ gains, with a price return of 106.6% for the year, contributing over 62% of the S&P 500 Index’s performance.

International equities

Like its global counterparts, the Europe, Australasia and Far East (EAFE) Index witnessed notable gains, rising 10.09% for the quarter when measured in U.S. dollar terms and 7.34% in Canadian dollars. 

The euro had a particularly strong quarter, appreciating over 4% against the U.S. dollar. A change in rate expectations between Europe and the U.S. brought about this currency strength.

Overall, international equities benefitted from renewed optimism and finished the year in positive territory.

Fixed income

Bond yields fell during the quarter, as the U.S. Federal Reserve hinted at a pivot in monetary policy. While inflation is much lower than where it was a year ago (and getting closer to its target rate of 2%), it remains above 3% and is proving sticky.

The Bloomberg Global Aggregate Index returned 8.1% in U.S. dollar terms, while the Canadian Universe Bond Index was up 8.27%.

The ICE US High Yield Index (representing U.S. high yield bonds) returned 7.06% in U.S. dollar terms (4.42% in Canadian dollars).

Looking ahead to the new year

Driven by a robust U.S. consumer base, decreasing inflation and central banks pausing rate hikes, both equities and bonds saw gains.

Central banks in Canada, Europe and the U.S. are expected to lower interest rates at some point in 2024. Signs show that the manufacturing and earnings slump is fading, the era of high inflation and high interest rates is ending, the earnings outlook is brighter, and indicators are pointing to a U.S. recovery.

Higher valuations in the fourth quarter reflected this improved outlook, however if this optimism is re-evaluated, it could cause some early-year volatility. Our approach, therefore, is to maintain a balance across asset classes and look for very strong diversification between and within asset classes.