Nicolet Wealth Management Monthly Newsletter 1.5.23

2023 Year in Review: Stocks

Global equity markets recovered from losses in 2022, posting strong gains despite banking crisis fears early in the year and higher interest costs. While all major global indices participated, U.S. stock market gains were mostly concentrated with the largest weighted, mega-capitalization stocks. The top 10 largest weighted stocks in the S&P 500 contributed 61% of returns, the highest level during positive performance years since 2007 when the top 10 contributed 78.7%. On the other side of the spectrum, emerging market stocks only returned 10% as concerns over China’s economic growth trajectory became front of mind. China’s weighting in emerging markets (EM) is 23%, the highest amongst all EM countries, making it a bellwether for the group. Last year, China’s stocks declined 13%, detracting nearly 4% from performance of EM.   

2023 Year in Review: Bonds

Bond performance oscillated in 2023, as interest rate volatility continues to remain a significant feature. The 10-year Treasury yield started the year at 3.87%, increased to a 16-year high of 4.99%, only to fall near a level of 3.88% at the end of the year. While the ride was bumpy, performance across the bond universe exhibited strong performance relative to the past 10 years. There are two reasons for the better than average performance: higher coupons and risk appetite. Bond coupons were higher, following interest rates. Next, increased appetite for bonds with credit risk followed stock market performance, as investors required less compensation relative to treasuries. U.S Corporate index rose 8.5% and U.S. Corporate High Yield index advanced 13.5%, while the U.S. Treasury index increased 4.1%.

Small-Capitalization Outshine Large-Capitalization Stocks

Stock market rallies consistently change form as time moves on. Most of this year, returns were driven by mega-capitalization technology stocks. Once interest rates shifted lower late October, contributors to equity returns changed, favoring small-capitalization stocks, as the asset class has greater sensitivity to interest rates, due to dependence on short-term borrowing and floating-rate debt. In addition, the cyclical Industrials and Financials sectors have an outsized weight amongst small-capitalization stocks. The market’s forecast of rate cuts totaling 1.50% in 2024 comforted investors to seek risk assets.

Homebuilding Reaccelerates  

New-home construction rebounded last year despite overall slower real estate activity. Higher mortgage rates and low existing home new listings have been headwinds for activity. According to bankrate.com, the 30-year mortgage rate topped 8% in October, before reversing course below 7% to end the year. Single-family housing starts accelerated from an annual rate of 887,000 homes to begin 2023, reaching the highest level since April 2022 at an annual rate of 1,143,000 homes in November. While last year’s trend in single-family starts is positive, sentiment amongst homebuilders remains negative given depressed permits to build and relatively higher mortgage rates.

Pivot. Pivot. PIIIVVVVVOT!

As Rachel, Ross and Chandler from the sitcom “Friends” demonstrated, pivoting is difficult. Whether it’s a couch in the case of the “Friends” episode or with rates in the case of the Federal Reserve (Fed), changing course can come with obstacles. Last month, the Fed decided to hold rates unchanged for the third consecutive meeting at 5.25%-5.50%, but its projections garnered the most attention. Federal Open Market Committee members expect the Fed funds rate to be cut by a total of 0.75% in 2024. In addition, Fed chair Jay Powell made notable comments about rate cuts, suggesting the Fed needs to consider both of its mandates, inflation and employment, after multiple years of fighting rising prices. History tells us balancing both mandates has been a difficult task for the Fed to manage.

Although we believe it to be reliable as of the publication date and have sought to take reasonable care in its preparation, all information provided is FOR INFORMATIONAL PURPOSES ONLY and we make no representations or warranties regarding its accuracy, reliability, or completeness and assume no duty to make any updates in the event of future changes. Past performance may not be indicative of future market results. Any examples used (including specific securities) are generic and meant for illustration purposes only and are not, and should not be interpreted as, offers to buy or sell such securities. To the extent indices are referenced, please note that you are not able to invest directly in an index.

Nicolet Wealth Management is a brand name that refers to Nicolet National Bank and certain of its departments and affiliates that provide investment advisory, trust, retirement planning and insurance services. Investment advisory services offered through Nicolet Advisory Services, LLC (dba Nicolet Wealth Management), a registered investment advisor.

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