Welcome to the monthly market update from Midland Wealth Management. I am Chris Zabel, Assistant Portfolio Manager. Today I wanted to take a few minutes to give you an update on the markets for the month of December.

Market Returns for December

Santa Claus showed up again this year for investors and delivered strong returns in both the fixed income and equity markets. December built off of November’s momentum with another strong month of returns. Inflation has continued its downward trend and investors are more confident that the Federal Reserve is done raising rates. In fact, investors are currently anticipating they will cut the fed funds rate by 1.25% by the end of 2024.

The S&P 500 Index continued its momentum from November with another 4.4% increase in December, finishing the year up 24.2%. The largest technology companies in the index drove a majority of the returns for the year. Also within the U.S. equity market, the S&P SmallCap 600® Index had a strong rally in December posting a 12.6% return. The performance of small-cap stocks in November and December pulled the S&P 600 Index back into positive territory for the year finishing up 13.9% in 2023.

Bond returns also continued their strong rally into December with help from longer-term interest rates moving lower. The Bloomberg U.S. Aggregate Bond Index was up nearly 4% for the month and 6.8% for the fourth quarter, which is the strongest quarterly return dating back to 1989. The 10-year Treasury yield, which peaked around 5% in late October, finished the year back below 4%.

GDP

The U.S. economy grew at a fast pace in the third quarter of 2023, with the final GDP report coming in at a 4.9% annualized growth rate. GDP growth is expected to moderate with most economists expecting a growth rate between 1.0% to 2.0% in the fourth quarter of 2023 and for the full year 2024.

Federal Reserve

On December 13th, the Federal Reserve held its key interest rate unchanged and forecasted possible rate cuts in 2024, as most economists had expected. However, the central bank will be prepared to tighten fiscal policy further if inflation does not continue to moderate. The Federal Reserve is currently expected to leave interest rates unchanged at their next meeting with a possible rate cut coming in March. Short-term interest rates remain at a near-term high, which continues to weigh on the amount of debt that consumers and businesses look to borrow. This is the main tool that the Federal Reserve is using to fight inflation by slowing down the economy.

Outlook

The focus of investors at the beginning of 2024 will likely remain on the consumer and the path of inflation. Consumer spending is expected to slow down and give support to inflation continuing its downward momentum. If inflation continues to moderate toward the 2% target of the Federal Reserve, they are likely to start cutting short-term interest rates.

As always, thanks for joining me for this month’s market recap.