Closing Market Update | Charles Schwab
Stocks Fall on Last Day of a Strong Year
December 29, 2023 Schwab Center for Financial Research
Major indexes wilted in the last trading session of 2023, but the S&P 500 posted a 24% annual gain.
Readers' note: During this holiday week, we'll be publishing express editions of our regular Daily Market Updates. We'll return to our regular format January 2.
(Friday market close) Hopes that the S&P 500 index (SPX) could establish a new all-time high in 2023 faded with the old year Friday as major U.S. equity benchmarks lost ground on December's final trading day. Still, the SPX managed to post its ninth-straight winning week and finished up 24% for the year after falling more than 19% in 2022. Friday's close left the index just 0.4% below its record close of 4,796 posted on January 3, 2022.
Like other large-cap benchmarks, the S&P 500 turned in a strong year behind outsized gains in the biggest technology stocks, propelled by excitement over artificial intelligence (AI). While AI might've been the biggest theme of the year, the Federal Reserve's recent pivot toward possible interest rate trims in 2024 crushed a long rally in Treasury yields, helping interest-rate-sensitive small caps and financials participate in the late-2023 rally as well.
Optimism also stemmed from hopes the Fed can navigate a "soft landing" for the economy that avoids recession even as inflation growth continues to slow. Investors eagerly await the December Nonfarm Payrolls report scheduled January 5 for the latest read on the U.S. economic picture.
Here's where the major benchmarks ended:
- The S&P 500 index fell 13.52 points (0.28%) to 4,769.83; the Dow Jones Industrial Average® was down 20.56 points (0.05%) at 37,689.54; the Nasdaq Composite® (COMP) was down 83.78 points (-0.56%) at 15,011.35.
- The 10-year Treasury note yield (TNX) rose nearly 2 basis points to 3.86%.
- The Cboe® Volatility Index (VIX) finished nearly unchanged at 12.51, still near recent four-year lows.
The S&P 500 and Dow Jones Industrial Average posted their ninth consecutive weekly advances, but the Nasdaq Composite finished slightly lower for the week, hurt in part by a soft performance from Apple (AAPL). The Russell 2000® Index (RUT) fell 1.18% on Friday but climbed 15% for the year.
Sector-wise this year, info tech and communication services stocks each posted better than 50% gains, driven partly by the increasing adoption of AI. Resilient U.S. consumers in a solid job market helped send the consumer discretionary sector to more than 40% gains in 2023. Other double-digit sector gainers for the year include industrials, materials, and financials, which is surprising considering last spring's bank industry worries.
Three S&P 500 sectors posted losses in 2023. Utilities fell more than 10% as 16-year highs in Treasury yields posed heavy competition for dividend payers. Staples suffered from that too, in addition to slowing inflation that provided many manufacturers less pricing power. Energy also finished in the red because crude oil prices sagged under the weight of heavy U.S. and other non-OPEC production. U.S. WTI crude suffered its first annual decline since 2020, finishing the year below $72 per barrel after jumping above $90 per barrel in late September.
Overseas, Japan's stock market led most advanced economies with 28% gains in 2023, helped by the reappearance of inflation after a long absence. Stocks in China fell about 4%, hurt by U.S. sanctions and a troubled property market. India's stock market had a strong year, fueled in part by cheap oil and manufacturers eyeing operations there in place of or addition to China.
The broad European market rose about 13% but couldn't keep up with U.S. stocks in part because the European Central Bank currently appears more hawkish than the Fed, judging from recent policymaker comments.
Turning to bonds, the benchmark U.S. 10-year Treasury yield ran all over the field in 2023 before getting tackled for no gain. After closing out 2022 just under 3.88%, it soared to a peak intraday high of just above 5% in mid-October, the first time it touched that level since 2007. Since then, it backtracked all the way down to below 3.8% earlier this week before closing the year basically unchanged at 3.86%.
The more interest rate-sensitive 2-year Treasury note finished 2023 down 17 basis points for the year at 4.25%, following a 45-basis point decline in December.
Falling inflation and the Fed's more dovish rate projections in December helped turn the page for yields, but shorter-term Treasury yields continue to hold a premium to longer-term yields. Historically, this often has signaled recession ahead.
Stocks on the move
The following companies had news-driven stock price moves:
- Boston Scientific (BSX) rose 2.7% after the company reported it anticipates U.S. Food and Drug Administration (FDA) approval of its FARAPULSE Pulsed Field Ablation System in the first quarter of 2024.
- Coinbase Global (COIN) plunged 6.7% after an Indian government agency said it would block websites of nine global crypto exchanges.
- Hershey Foods (HSY) gained 1.3% in what appeared to be technically related buying.
- JD (JD) climbed 1.3% after Bloomberg reported it won damages in an anti-monopoly case.
- Walgreens Boots Alliance (WBA) fell 1.84% ahead of its expected earnings report next week.
Next week's earnings calendar is expected to include quarterly results from BHP Group Ltd (BHP), one of the world's biggest miners, food producer Conagra Brands (CAG), and pharmacy chain Walgreens Boots Alliance (WBA), the Dow Industrials' weakest performer this year with a decline of nearly 29% through Thursday.
Midwest malaise
Early Friday, the Chicago Purchasing Managers’ Index (PMI) for December fell sharply from the previous month and back into contraction territory at a sluggish 46.9. The Briefing.com consensus was 50 going into the report, and November's 55.8 was surprisingly robust. A 50 or higher reading is needed to signal expansion, and November's report was the first in more than a year to show expansion.
The weaker-than-expected Chicago PMI follows the December Richmond Fed composite manufacturing index, which came in at –11, worse than the –5 prior reading. Much of the recent inflation growth slowdown continues to be in the consumer goods sector of the economy, hurting manufacturers. Food company shares, for instance, have had a tough go in 2023, and prices for food prepared at home are now tracking barely higher than a year ago, according to government statistics. That's welcome news for home chefs but bad for food processors.
Generally, recent disinflationary trends could be a weight on markets next year beyond just manufacturing. Pricing power helped drive recent earnings gains for companies across many sectors, but it's unclear if companies can still raise prices as much to pad margins.
The Chicago PMI report only looks at the Chicago region. But next Friday's December payrolls report covers the entire economy and tends to carry more weight in terms of market impact. Job growth was surprisingly resilient much of the year, with monthly payroll numbers topping Wall Street expectations several times.
Earlier this month, the Labor Department reported 199,000 jobs created during November, up from 150,000 in October and about 20,000 above expectations. November's unemployment rate fell to 3.7% from October’s 3.9%. December payrolls are expected to have risen to 158,000, according to Trading Economics, and the unemployment rate is expected to have risen to 3.8%.
There's jobs data before payrolls next week in the form of Wednesday's November Job Openings and Labor Turnover Survey (JOLTS). The October JOLTS report showed 8.773 million openings, down sharply from a surprisingly firm September report. Analysts anticipate almost no change in openings for November, with Trading Economics putting consensus at 8.8 million. Any further tightening might be welcomed by Fed policymakers trying to clamp down on inflation.
Any upside surprises in next week's jobs numbers could prompt investors to quickly reassess expectations for when the Fed may initially lower rates and how many times it may do so. Market indicators suggest investors expect five or six quarter-point cuts in 2024, a number many analysts consider too optimistic. However, if the economy slows as some analysts expect, that could have an impact on the Fed's decision-making.
Late Friday, futures traders placed odds at 83.5% the Federal Open Market Committee (FOMC) will hold its benchmark funds rate target unchanged at 5.25% to 5.5% following its January 30–31 meeting, according to the CME FedWatch Tool. The market prices in an 87% chance the funds rate will be at least a quarter point lower after the Fed's March meeting. |
