Global Equity Weekly

December 22, 2023 | 13:51

2023 Bull Market Awards

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Equity markets are closing 2023 on a strong note, with a sharp decline in Treasury yields, the prospect of 2024 rate cuts and a coveted soft landing all on investors’ radar. With a strong finish as the backdrop, we present some awards for 2023:

Most valuable player: The S&P 500. The broad equity index is up a hefty 24% heading into the end of the year, on pace for one of the strongest annual performances of the past twenty years. Over that period, there have been just four other years with 20%- plus gains, and 2023 would rank in the top quartile of post-war era returns. That said, there’s more nuance to this story given that only three sectors actually posted 20% returns or better, while seven of ten saw single-digit returns or worse. The top line of technology, telecom services and consumer discretionary powered most of the equity market returns in 2023, so investors with the wrong exposure might not have felt it as much. Note that the Nasdaq swung from a 33% loss in 2022 to a massive 43% rebound so far this year—that’s your real MVP.

As of noon Friday

Best defender: CPI. The defence of the bull market was largely thanks to crumbling inflation, which allowed many other things (e.g. interest rates, recession calls) to go right. Headline U.S. inflation sat at 6.5% y/y last December, and faded to 3.1% y/y by November 2023. Similarly, the ‘supercore’ measure that caught the ire of the Fed melted from 6.2% y/y to 3.9% y/y over that period. That left enough evidence for the Fed to back off its tightening campaign, and project rate cuts for 2024… much to the relief of the bulls.

Most improved player: Yields. With the inflation backdrop and Fed outlook in mind, the 10-year Treasury yield swung from an absolute drain on equity performance, to one of its biggest supporters. The 10-year yield was up more than 110 bps at one point, to the 5% level, before turning sharply lower toward year-end (3.9% at time of writing). Without question, that has eased financial conditions and made the soft landing narrative more plausible… much to the relief of the bulls.

Comeback performer: The 60/40 portfolio. The balanced 60/40 portfolio of stocks and bonds (we’ll use the S&P 500 and 10-year Treasury total returns here) was absolutely decimated in 2022, down 17.4% in the worst combined performance since at least 1971. That same portfolio is now on pace for a near-17% rebound in 2023 with bonds and stocks both benefitting from cooler inflation and the presumed end of the tightening cycle.

Rookie of the year: Arm Holdings. According to EY, global IPO volume and value are both down somewhat from 2022 (and much more significantly from the 2021 boom). The flashy names included Instacart, Arm and Birkenstock. Based on overall dollar value and in-year performance, chip producer Arm Holdings probably gets the honour this year.

Most sportsmanlike: Jay Powell. The Federal Reserve’s last policy announcement of 2023 set the stage for a strong run for financial markets. The Fed remained on hold and projected 75 bps of easing for 2024 in their dot-plot forecast, which the market quickly ran with to price in even more easing. And, when given the opportunity at the podium to talk down the market’s optimism, Chair Powell more or less let it run like a true bullish sportsman.

All told, let’s just say the mood heading into the new year is magnitudes better than a year ago. Inflation is cooling, a soft landing is the new consensus, and there are about 150 bps of easing priced in for 2024. This would be a great outcome for financial markets but, of course, that expectations bar is that much tougher to beat than last year.

Major Index Performance

North American Sector Performances

(% change over period)

Table 1 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg. As of noon Friday.

Table 2 - TSX Sector Performance

Source: BMO Economics, Bloomberg. As of noon Friday.

TSX Relative Sector Performance

(relative to the index, year-ago = 100; dashed line = 200-day m.a.)

S&P 500 Relative Sector Performance