The much-feared recession that was supposed to happen in 2023 never came to fruition. Despite a lot of economic data suggesting slower growth, the surprising strength in the labor markets provided enough of a tailwind to keep the economy growing.
As usual, dysfunction and gridlock reigned in Washington. Fortunately, investors tend to love political gridlock, as it limits new constraints on the economy and the markets.
ELEVATED PRICES / INFLATION FRUSTRATION
Inflation came down in 2023, but most prices didn’t. This caused some confusion for many Americans, as they didn’t see any real improvement in their monthly costs even though the experts were saying things were getting better.
Employers continued to have difficulty in finding workers. More specifically, they had trouble finding dependable people willing to work the necessary hours at the wages companies wanted to pay.
The Federal Reserve didn’t cut the overnight lending target rate the way many thought it would in 2023. However, that didn’t seem to deter investors. It seems simply knowing there wouldn’t be any more rate hikes was enough to send stocks soaring at times during the year, especially in November and December.
Global conflicts tested both American resolve and military stockpiles. By the end of the year, it wasn’t clear whether the U.S. will have the desire or industrial ability to continue to support its allies, both new and old, in the manner with which they have become accustomed.
LARGE CAP GROWTH STOCKS
After a disastrous 2022, large cap growth stocks (read: technology and communications) rebounded sharply in 2023. The strength of the advance, however, led many investors to wonder whether the pendulum had swung back too far by year end.
The market limitations of the administration’s green energy initiatives became increasingly apparent as the year progressed. U.S. manufacturers are behind in the EV race, and consumer demand has failed to meet idealistic expectations. It reminded one of the old expression: “wanting something to happen doesn’t mean it will.”
Although the banking system teetered during the 1st quarter of 2023, it didn’t fall. The reason? There is a significant difference between a non-performing asset and a repriced one. The former leads to a permanent erosion in capital, whereas the latter usually only leads to a temporary one. After all, if you hold an “underwater” bond long enough, it should mature at par.
A number of companies learned a powerful lesson the hard way in 2023. It is always a best practice to market a company’s product or service instead of senior management’s perceived political positions.
Asia and even Africa’s relative indifference to the war in Ukraine underscored the growing gap between the so-called Global North and Global South. The latter essentially being the former Third World. This will have long lasting implications, as the geopolitical landscape continues to shift from Eurocentrism to Asiacentrism.
MILITARY STOCKPILE LIMITATIONS
In 2023, the Pentagon found out boring, conventional munitions like 155mm artillery shells still matter, and in a big way. The drawdown on these stockpiles is showing the limitations of our military industrial complex, especially relative to the Russians and Chinese. While our material is more advanced, it is also more expensive and time-consuming to produce.
THE DEBT CEILING
No matter who is in the White House, Congress must periodically raise the debt ceiling. It doesn’t really have any choice, that is, if it wants to continue paying Social Security, Medicare, Medicaid, the Department of Defense and servicing the debt. To that end, we could eliminate all other discretionary expenditures in Washington and still run a massive annual deficit.
By the end of the year, it seemed Americans were finally growing weary of yet more comic book movies, reboots, prequels and endless sequels. Hollywood can blame whatever it wants for consumer indifference, however, its own lack of originality has to be in there somewhere.
One of the biggest buzz phrases for 2023 was “artificial intelligence” or AI. It seemed to be on everyone’s mind, with some even speculating how it could lead to the extinction of human beings. However, if and when it ever gets to that worst-case scenario, we should all unplug our machines and pick up a book instead.
In 2023, right-of-center political parties performed well in national elections around the world. This will likely continue, as voters increasingly reject the globalism which arguably hasn’t produced the results their leaders had promised.
ELECTION AHEAD! NORMALCY AVERTED!
We ended 2023 just like we did 2020, 2021 and 2022, hoping for a return to some type of normalcy. Unfortunately, we then remembered 2024 is an election year, one that could devolve into a circus pretty quickly.
This content is part of our quarterly outlook and overview. For more of our view on this quarter’s economic overview, inflation, bonds, equities and allocation read our entire Annual 2023 Macro & Market Perspectives.
The opinions expressed within this report are those of the Investment Committee as of the date published. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders or employees.