2023 Market Wrap-Up

Hello Traders, we hope you enjoy the holiday season. In this special edition of our weekly review, our final issue for the year, we'll revisit some of 2023's biggest stories, including:

• Three lenders made the list of biggest US bank failures in history.
• The US economy defied predictions for a major slowdown.
• Fitch Ratings stripped the US of its top-tier national debt rating.
• China set an annual growth target that was the lowest in three decades.
• India surpassed China as the world’s most populous country.
• Inflation fell significantly in many parts of the world.
• The Fed signaled that it would begin cutting rates in 2024.
• The BoJ scrapped its seven-year policy of capping long-term yields.
• OPEC+ doubled down on oil supply cuts.
• The price of gold hit an all time high.
• AI enthusiasm drove the Nasdaq 100 to its best year in a decade.

Dig deeper into these stories in this week’s review.

Bank collapses

The first half of the year saw several high-profile bank failures in the US. Silicon Valley Bank (SVB) collapsed after its customers, mainly startups and VC firms, yanked out their cash amid rumors about its financial position, with the bank facing significant losses on its bond portfolio due to higher interest rates. The bank tried to raise new capital but failed. It then looked for a buyer to save it, and that failed too, prompting US regulators to shut down the bank in March. Spooked by the news, customers rushed to withdraw their funds from another major lender, Signature Bank. Within hours of SVB's collapse, Signature Bank had lost 20% of its total deposits – a critical blow that eventually led to its failure as well.

Signature Bank Stock Price

That same week, Silvergate Capital, the regional lender that transformed itself into the go-to bank for crypto firms, announced plans to wind down its operations after the crypto industry’s latest meltdown – spurred by the collapse of crypto exchange FTX – sapped the company’s financial strength. A couple of months later, First Republic was shut down by US regulators, wiping out shareholders in the second-biggest bank failure in American history. First Republic was on the verge of collapse for almost two months, as deposits dwindled and its business model of providing cheap mortgages to wealthy customers was pressured by rising interest rates. Those higher rates also pushed up the bank’s funding costs as well as led to huge paper losses on its portfolio of bonds and other long-term assets. 

Finally, Credit Suisse, which was at the forefront of the banking industry’s drama, also went under. Clients pulled more than $100 billion of assets in the final quarter of 2022 as concerns mounted about its financial health, and the outflows continued even after it tapped shareholders in a 4 billion-franc capital raise. Even a liquidity backstop by the Swiss central bank in March this year failed to end the market’s worries. So after a tumultuous couple of weeks, things finally reached a dramatic end: UBS agreed to buy Credit Suisse on the 19th of March in a government-brokered deal that was aimed at containing the crisis of confidence fast spreading across global financial markets.

US economic resilience 

Against all odds, the US economy defied predictions for a major slowdown in 2023. Just look at its latest GDP numbers, which showed the US economy grew at its fastest pace in nearly two years in the third quarter, driven primarily by a surge in consumer spending. More specifically, growth soared to an annualized rate of 4.9%, a significant increase from the pace seen in the second quarter and ahead of the 4.5% that was forecast by economists. Personal spending, a key driver of economic growth, surged by 4% despite higher prices and a big increase in borrowing costs.

The key reason behind this resilience in consumer spending was the surplus funds that Americans accumulated during the pandemic. From March 2020 to August 2021, Americans' savings grew substantially, driven by stimulus checks, government benefits, and reduced spending on activities like restaurant meals and vacations. That excess cash, which at its peak hit $2.3 trillion, allowed US consumers to continue spending despite sky-high inflation, shielding the economy from a recession even after the Fed hiked interest rates at the fastest pace in four decades. However, since August 2021, consumers have been gradually depleting those excess savings, with around $1.1 trillion remaining.

As the cash cushion shrinks, households face a dilemma: either reduce their spending or continue it by incurring more debt. But with credit becoming more expensive and harder to get due to the Fed’s actions, Americans might have to curtail their outlays. That's not good news for the US, considering consumer spending constitutes over two-thirds of the economy. To be sure, not everyone is convinced. Some economists hold a more optimistic view, believing that falling inflation and a robust job market will equip consumers with the means to continue spending, even as their savings shrink. 

US downgrade 

In August, the US was stripped of its top-tier sovereign debt rating by Fitch Ratings, which criticized the country’s ballooning fiscal deficit and an “erosion of governance” that’s led to repeated clashes over the debt ceiling in the past two decades. The cut took the US’s credit rating down one level from AAA to AA+, and came two months after political confrontations nearly pushed the world's biggest economy towards a sovereign default. Fitch’s decision echoed a move made more than a decade ago by S&P Global Ratings.

See, tax cuts and fresh spending programs, along with several economic upheavals, have inflated the government's budget deficit, which hit $1.7 trillion in fiscal 2023. That’s the third-largest on record, and the biggest shortfall ever recorded outside of the Covid-19 pandemic years. Not helping matters were rising interest rates and the US’s rapidly swelling debt pile, which Fitch forecasts will reach 118% of GDP by 2025 (over 2.5x higher than AAA-rated countries’ median of 39%). The rating agency projects the debt-to-GDP ratio will rise even further in the longer term, increasing the US’s vulnerability to future economic shocks.

China’s disappointing target

In the first quarter, China’s government officially set an underwhelming economic growth target of “around 5%” for 2023. The objective was the lowest in over three decades and down from last year’s goal of 5.5%. Economists were expecting (and investors were hoping for) a goal of above 5%. But many reckon that the Chinese government purposely set a conservative target that would be easier for the president’s new economic team to meet, after falling far short of its goal the previous year. The world’s second-biggest economy expanded by just 3% in 2022 – 2.5 percentage points below target – on the back of the government’s strict zero-Covid policies, which hit growth.

On the flip side, the low base from last year will make this year’s growth target easier to achieve. The IMF certainly thinks so: it recently raised its forecasts for China’s economic growth this year and next on the back of stronger policy support from the government, but cautioned that weakness in the property sector and muted external demand would persist. The fund sees China’s economy expanding by 5.4% in 2023, up from a previous estimate of 5%. It also upgraded its growth forecast for 2024 to 4.6% from an earlier projection of 4.2%. Over the medium term, GDP growth is projected to decline gradually to about 3.5% by 2028, due to weak productivity and an aging population.

India’s rise

Speaking of population dynamics, India reached a historic milestone in April, surpassing China as the world’s most populous country in a pivotal moment for the two neighbors and geopolitical rivals. And while China’s population is aging and shrinking, India’s is relatively young and growing, with half of the population under the age of 30. What’s more, over two-thirds of India’s population are of working age (between 15-64 years old), meaning the country can produce and consume more goods and services, drive innovation, and more. That’s why India is poised to become the world's fastest-growing major economy in the coming years, and is projected to surpass both Japan and Germany in size by 2027, securing its position as the third-biggest economy globally.

End of global monetary tightening

Towards the end of the year, central banks in the US, the UK, the eurozone, Japan, and Switzerland all started keeping interest rates unchanged, and that led the chief global economist at consultancy Capital Economics to declare that “the global monetary tightening cycle has ended”. Put differently, central banks worldwide are mostly done hiking interest rates. And this conclusion wasn’t based on some gut feeling: for the first time since the end of 2020, more of the world’s 30 biggest central banks were expected to cut rates in the final quarter of 2023 than raise them, according to Capital Economics.

The change in stance among major central banks comes after inflation fell significantly in many parts of the world throughout 2023. In November, the annual inflation rates in the US, eurozone, and UK were 3.1%, 2.4%, and 3.9%, respectively. Those are all still above their central banks’ 2% targets, sure, but consider just how far down they’ve come: in January, inflation in the US, eurozone, and UK was running at 6.4%, 8.6%, and 10.1%, respectively. So with significant progress made in cooling price pressures, and keen to avoid keeping economy-busting high interest rates for longer than necessary, major central banks are set to change their stances, and investors should brace for interest rate cuts in 2024.

Fed’s pivot

Acknowledging the reduction in inflation but emphasizing that the battle hasn’t been won yet, the Fed kept borrowing costs unchanged for a third meeting in a row in December. But it gave its clearest signal yet that its aggressive hiking campaign is over and that it’ll begin lowering interest rates in 2024. The benchmark federal funds rate was held steady at a 22-year high of 5.25% to 5.5%, with the decision coming alongside new forecasts pointing to 75 basis points worth of cuts next year – a more dovish outlook for interest rates than in previous projections. The central bank’s “dot plot” showed most officials expected rates to end next year at 4.5% to 4.75%, and 2025 at 3.5% and 3.75%. 

Japan’s reluctant exit

The Bank of Japan has been under increasing pressure to end its long-running experiment with ultra-loose monetary policy, especially in the face of a weakening yen, rising bond yields, and above-target inflation. And it recently took a big step towards ending its seven-year policy of capping long-term yields, setting the stage for bigger policy changes down the road. In November, the BoJ decided to allow the 10-year Japanese government bond yield to exceed 1%, marking the second revision to its yield curve control program in three months. This followed the bank’s prior commitment to purchase 10-year bonds at a fixed 1% rate, up from 0.5% in July.

But the BoJ did not indicate when it’ll change its stance on short-term interest rates, which have remained in negative territory since 2016 – even when many of the world’s central banks hiked borrowing costs over the past two years. That’s because it’s trying to nudge consumer prices higher after battling with economy-crushing deflation for more than two decades. However, with Japan’s inflation exceeding the BoJ’s 2% target since April 2022 and other major central banks starting to signal a change in their stances, investors were hoping that the BoJ would also alter its policy and offer some indication of when it’ll start lifting interest rates. But much to their disappointment, the central bank stuck to its tone at its most recent meeting in December, pledging to keep its negative interest rates for as long as it is necessary.

OPEC supply cuts

Central banks trying to fight inflation in 2023 didn’t need any more obstacles, but it’s exactly what they got in April after OPEC+ announced plans to cut oil output by 1.66 million barrels a day from May until the end of the year. The pledge came on top of previous trims to production announced in 2022 and brought the total volume of cuts by OPEC+ to 3.66 million barrels a day, or 3.7% of global demand. A couple of months later, Saudi Arabia took a unilateral decision to curb output by an additional 1 million barrels a day from July, taking its production to the lowest level in several years. Russia soon joined with a voluntary supply reduction of 500,000 barrels a day, with both countries recently announcing that they’re rolling those cuts over into the first quarter of 2024.

Undermining the cartel’s efforts to curb supply and lift crude prices is the significant increase in production from the US shale oil industry in 2023. A year ago, forecasters predicted US production would average 12.5 million barrels a day during the fourth quarter of 2023. In recent days, that estimate was bumped to 13.3 million – the difference comparable to adding a new Venezuela to the global oil market. What's remarkable about the spike is that companies have increased production despite a roughly 20% decrease in active drilling rigs this year, thanks to efficiency improvements.

Gold hits records

Gold briefly hit an intra-day record of $2,135 an ounce in December, surpassing the previous all-time high it set in August 2020. The latest rally came as bond yields and the dollar fell amid growing expectations for US rate cuts in 2024. But there were a few other factors that drove gold’s strength in 2023. First, demand for the precious metal has been propped up by record buying from central banks over the past 18 months, as some countries looked to diversify their reserves to reduce their reliance on the dollar after the US weaponized its currency in sanctions against Russia. Second, gold's reputation as a safe-haven asset bolstered its performance in 2023 due to geopolitical and economic turbulence, with two ongoing wars and 41% of the world’s population due to go to the polls in 2024.

AI-fueled stock market rally

The world's leading tech firms helped propel the Nasdaq 100 index to its best year in over a decade, as enthusiasm for AI outweighed concerns about the effects of higher interest rates in 2023. The seven largest tech and internet-related stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla – saw their combined weighting in the S&P 500 rise to a record 29% in November. Investors gravitated toward these companies, betting on their superior ability to leverage AI given their huge scale and financial strength. As of mid-December, the cohort had contributed to approximately two-thirds of the S&P 500’s 23% rise in 2023.

And that’s a wrap folks! As we close the chapter on an eventful 2023, we wanted to extend our heartfelt wishes for your continued success in trading and investing throughout 2024. See you in the new year.