The United States equity market has been on a roller coaster ride for much of 2023, and despite fears over a looming recession, the three major U.S. indexes closed out the final trading session of the year near record highs.
The S&P 500 closed 2023 with a 24.7% increase on the year, while the Dow and the Nasdaq Composite rose 13.7% and 54.9%, respectively, according to Trading Economics.
The AI-backed rally truly kicked off in January following the arrival of ChatGPT at the end of 2022. The arrival of generative AI propelled stocks like Facebook (META), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOG), and Microsoft (MSFT) from multi-year lows back towards record highs.
For instance, Nvidia soared 245% while Meta rallied 183% over the last 12 months.
While many economists and forecasters anticipated a major recession in 2023, investors held firm that the Federal Reserve’s current tightening cycle was on an unsustainable trajectory.
During the final policy meeting of the year, Fed participants agreed to maintain the target range for the federal funds rate between 5.25% and 5.50%, closing out a year that saw four 25-basis-point increases and three rate pauses.
Along with holding rates steady in December, Fed participants have forecasted 75 basis points of rate cuts by the end of 2024, according to the latest Summary of Economic Projections.
While 2024 is guaranteed to have its own twists and turns, the stock market is on the correct path, according to Eric Winograd, senior economist at AllianceBernstein in New York.
“While I think the magnitude of the market response is exaggerated, the direction is correct: the Fed for the first time this cycle opened the door to rate cuts across a reasonable forecast horizon, and that is significant,” said Winograd, Reuters reported.
Despite slow momentum on the final trading day of 2023, the S&P 500 shrugged off recession fears, posting its longest streak of weekly gains since 2004, while the Dow saw its longest streak since 2019.
As the Fed works to bring inflation down to the Central Bank’s 2% goal, market expectations for a soft landing are increasing, ultimately propelling shares of companies back to record highs. If the U.S. economy avoids any potential ‘black swan’ events in 2024, and the Fed does begin to cut rates, the stock market will have no headwinds stopping it from soaring higher.
