In the fourth quarter, U.S. equities rallied on expectations that the Federal Reserve would begin cutting rates in early 2024 following weak economic data coming out of both the US and international markets. Rate-sensitive sectors like technology, consumer discretionary, and real estate did well, while energy dipped in light of weak oil prices. Small cap outperformed large cap, a slight reversal of the overall trend for the year, but both posted returns in the low double-digits.
International developed equities and emerging markets (EM) equities both posted positive returns for the quarter, despite getting off to a weak start, on expectations of imminent rate cuts and easing inflationary pressures. Growth and rate-sensitive sectors outperformed, while China continued to weigh down EM performance, which left room for developed market equities to outperform.
Inflation, measured by CPI, decreased in October and November but increased in December to a year-over-year rate of 3.4%. CPI excluding food and energy, generally viewed as sticky inflation or Core CPI, fell to a year-over-year rate of 3.9% from 4.1% in September. Indicators used to measure U.S. economic activity such as the ISM Manufacturing and Non-Manufacturing indexes marginally decreased over the quarter. ISM Manufacturing PMI continued to show contractionary economic activity while ISM Non-Manufacturing showed expansionary economic activity, creating an uncertain outlook of taming inflation for the Fed.
As inflation continued to trend lower in the fourth quarter, the Federal Reserve agreed to leave rates unchanged at a range between 5.25% - 5.50% at the December FOMC meeting. During the meeting, the Fed communicated that holding interest rates at elevated levels for too long is a risk they are monitoring and signaled three potential rate cuts of 25 basis points by the end of 2024. This was a large pivot from their September FOMC communication where they announced that rates could stay higher for longer. As a result, intermediate-to-long-term treasury yields fell, and risk assets rallied during the quarter. Investment grade (IG) spreads narrowed from 125 basis points (bps) to 104 bps, and high yield (HY) spreads narrowed from 403 bps to 339 bps over the quarter, well below their long-term medians.
To view the fourth quarter reports, click on the links below: