The S&P 500 finished 2023 up 24.23% (Morningstar data source). Even though the index was positive throughout the year, the volatility was challenging.

(SPY is an ETF that tracks the S&P 500. Graph illustrates SPY performance for 2023)

Expectations of lower interest rates and a soft or no landing drove the rally during the past two months. Four important assumptions underpin current expectations.

The market consensus supporting valuations includes:
1. Six rate cuts for a 1.5% cut in the discount rate, bringing the year-end fed funds rate below 4%.
2. No economic slowdown/sustained earnings growth
3. Geopolitical conflicts do not worsen.
4. Domestic political situation does not deteriorate.

These assumptions are not necessarily wrong, but they may be optimistic. The issue is how events surrounding these issues unfold.

Other observations to keep in mind as 2024 kicks off. The Magnificent 7 large cap tech stocks that comprise about 28% of the market cap weighted index (as of 12/19/2023) overshadow the S&P 500 performance. Using the S&P 500 as a benchmark is problematic in that it skews the risk/return of the broader market. I expect the market to broaden as the rest of the market plays catchup and large cap tech cools.

Investing involves risk, including the possible loss of principal. Past experience does not predict future returns. I could go and and list all the other boilerplate language that regulators like to see, but I’ll stop here. If you have any questions about anthing inferred from this post, please consult with me or another investment advisor.