NEW YORK (`) — The S&P 500 ended 2023 with a gain of more than 24% and the Dow closed near a record high as easing inflation, a robust economy and the prospect of lower interest rates particularly appealed to investors recently Two months of the year provided a boost.
Shares closed with slight losses on Friday.
The S&P 500 slipped 13.52 points, or 0.3%, to 4,769.83. The benchmark index still posted a rare ninth straight week of gains and is just 0.6% below its January 2022 all-time high.
The Dow Jones Industrial Average fell 20.56 points, or 0.1%, to 37,689.54 after setting a record on Thursday.
The Nasdaq slipped 83.78 points, or 0.6%, to 15,011.35, but that was hardly a blemish given an annual gain of more than 43%, its best performance since 2020.
For most of the year, gains in the overall market were driven primarily by seven stocks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla. They, the “Magnificent 7,” accounted for about two-thirds of the gains in the S&P 500 this year, according to S&P Dow Jones Indices. Nvidia leads the group with an increase of about 239%, driven by the artificial intelligence mania.
A strong rally in November and December marked a major psychological shift for investors, said Quincy Krosby, chief global strategist at LPL Financial, as it went beyond the big technology companies. The Russell 2000 index of smaller companies rose more than 20% in the two months, ending 2023 up 15.1% after falling 21.6% in 2022.
“It was the broad participation in the market that reinforced and confirmed the gains of particularly important smaller company stocks,” Krosby said.
Investors in the US earlier this year felt the heavy losses in both stocks and bonds in 2022. They expected inflation to fall further as the Federal Reserve raised interest rates. The trade-off would be a weaker economy and possibly a recession. But while inflation has fallen to around 3%, the economy is doing well thanks to solid consumer spending and a healthy job market.
The stock market is now betting that the Fed can achieve a “soft landing,” in which the economy slows just enough to ease high inflation, but not so much that it falls into recession. Therefore, investors now assume that the Fed will start cutting interest rates as early as March.
The Fed has announced that it will cut its key interest rate by three quarter points next year. This rate is currently between 5.25% and 5.50%, the highest level in two decades.
Lower interest rates could further boost broader market momentum in 2024. Wall Street is forecasting stronger profit growth for companies next year after a largely lackluster 2023 as companies struggled with higher input and labor costs and a shift in consumer spending.
Investors in the bond market appeared to be headed for a third year of losses in a row until the situation changed at the end of October. Excitement over possible interest rate cuts sent bond prices soaring and yields falling. The yield on the 10-year Treasury note, which hit 5% in October, was 3.88% on Friday, up from 3.85% on Thursday.
The two-year Treasury yield, more in line with Fed expectations, fell to 4.25% from 4.28% late Thursday. In October it also exceeded the 5 percent mark.
Many global markets also recorded solid growth this year. The indices in France and Germany recorded double-digit gains, while the British indices rose by almost 4%.
Tokyo's Nikkei 225 rose 27% in 2023, its best year in a decade, as Japan's central bank moved slowly toward ending its long-standing ultra-loose monetary policy after inflation finally exceeded its target of about 2%.
The Shanghai Composite Index has lost about 3% this year and Hong Kong's Hang Seng Index has fallen nearly 14%. Weakness in the real estate sector and global demand for Chinese exports, as well as high debt levels and wavering consumer confidence, have weighed on the country's economy and stock market.
U.S. and international crude oil prices were relatively stable on Friday. Oil prices have fallen more than 10% this year, defying some experts' predictions that they could top $100 a barrel.
Despite production cuts by OPEC, a war between energy exporter Russia and another in the Middle East, the U.S. benchmark crude oil price fell nearly 11% in 2023 and a whopping 21% in the final three months of the year.
Increased production in the USA, now the world's largest oil producer, as well as in Canada, Brazil and Guyana offset lower OPEC production. Not all OPEC members participated in the cuts and some countries such as Iran and Venezuela are pumping more oil, energy analysts say.
Charles Sheehan contributed to this report.
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