Resilient economy energizes investors, as financial markets end 2023 up 24%

People pass the front of the New York Stock Exchange in New York, Tuesday, March 21, 2023. (AP Photo/Peter Morgan, File)

NEW YORK (AP) — The S&P 500 closed out 2023 with a gain of more than 24% and the Dow finished near a record high, as easing inflation, a resilient economy and the prospect of lower interest rates buoyed investors, particularly in the last two months of the year.

Stocks closed Friday with modest losses.

The S&P 500 slipped 13.52 points, or 0.3%, to 4,769.83. The benchmark index still posted a rare ninth consecutive week of gains and is just 0.6% shy of an all-time high set in January of 2022.

The Dow Jones Industrial Average fell 20.56 points, or 0.1%, to 37,689.54 after setting a record Thursday.

The Nasdaq slipped 83.78 points, or 0.6%, to 15,011.35, but that was barely a blemish on an annual gain of more than 43%, its best performance since 2020.

For most of the year, gains in the broader market were driven largely by seven stocks -- Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla. Dubbed the Magnificent 7, they accounted for about two-thirds of the gains in the S&P 500 this year, according to S&P Dow Jones Indices. Nvidia lead the group with a gain of about 239%, driven by the mania surrounding artificial intelligence.

A strong rally in November and December marked a big psychological shift for investors, said Quincy Krosby, chief global strategist at LPL Financial, because it went beyond the big technology companies. The Russell 2000 index of smaller companies jumped more than 20% over the two months and finished 2023 with a 15.1% gain after falling 21.6% in 2022.

“It was broad participation in the market that reinforced and confirmed gains for smaller company stocks that were particularly important,” Krosby said.

Investors in the U.S. came into this year bearing the bruises of sharp losses for both stocks and bonds in 2022. They expected inflation to ease further as the Federal Reserve pushed interest rates higher. The trade-off would be a weaker economy and possibly a recession. But while inflation has come down to around 3%, the economy has chugged along thanks to solid consumer spending and a healthy job market.

The stock market is now betting the Fed can achieve a “soft landing,” where the economy slows just enough to snuff out high inflation, but not so much that it falls into a recession. As a result, investors now expect the Fed to begin cutting rates as early as March.

The Fed has signaled three quarter-point cuts to its benchmark interest rate next year. That rate is currently sitting between 5.25% and 5.50%, its highest level in two decades.

Lower rates could add more fuel to the broader market’s momentum in 2024. Wall Street is forecasting stronger earnings growth for companies next year after a largely lackluster 2023, when companies wrestled with higher input and labor costs and a shift in consumer spending.

Bond market investors appeared headed for a third losing year in a row until things turned around starting in late October. Excitement about potential cuts to interest rates sent bond prices soaring and yields dropping. The yield on the 10-year Treasury, which hit 5% in October, stood at 3.88% Friday, up from 3.85% on Thursday.

The yield on the two-year Treasury, which more closely tracks expectations for the Fed, fell to 4.25% from 4.28% from late Thursday. It also surpassed 5% in October.

Many global markets also saw solid gains this year. Indexes in France and Germany made double-digit advances, while Britain’s has climbed just under 4%.

Tokyo’s Nikkei 225 gained 27% in 2023, its best year in a decade as the Japanese central bank inched toward ending its longstanding ultra-lax monetary policy after inflation finally exceeded its target of about 2%.

The Shanghai Composite index lost about 3% this year and the Hang Seng index in Hong Kong fell nearly 14%. Weakness in the property sector and in global demand for China’s exports, as well as high debt levels and wavering consumer confidence have weighed on the country’s economy and the stock market.

U.S. and international crude oil prices were relatively stable on Friday. The price of oil tumbled by more than 10% this year, defying predictions from some experts that it could cross $100 per barrel.

Despite production cuts from OPEC, a war involving energy exporter Russia and another in the Middle East, U.S. benchmark crude dropped nearly 11% in 2023, and a whopping 21% in the final three months of the year.

Increased production in the U.S., now the top oil producer in the world, as well as Canada, Brazil and Guyana offset the reduced output from OPEC. Not all OPEC members participated in the cuts and some countries like Iran and Venezuela are pumping more oil, energy analysts say.

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Charles Sheehan contributed to this report.

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