Navigating the Financial Maze of 2023: A Comprehensive Year in Review

The financial markets of 2023 will likely be remembered as one of the most unusual periods in recent history. The year commenced with a flurry of uncertainties, with some dire predictions that, in hindsight, failed to materialize. Notably, a U.S. regional banking crisis and the cessation of Credit Suisse were among the unexpected events that added to the volatility.

In a twist of fate, despite the turbulence and contrary to many prognostications, the total return for the S&P 500 reached nearly 25% year-to-date. A global 60/40 portfolio also outperformed expectations, returning over 10%. However, the journey was far from smooth, marked by abrupt shifts and unforeseen challenges.

The financial narrative took an unexpected turn in March when the collapse of Silicon Valley Bank, a mid-sized U.S. lender, triggered a cascading effect on world shares. The subsequent rescue of the venerable 167-year-old institution, Credit Suisse, added further uncertainties. The world shares experienced a sharp decline, erasing all the gains made in January.

Investors, in a scramble for safety, sought refuge in gold, causing a 7% surge. Simultaneously, U.S. and European government bond yields, crucial drivers of global borrowing costs, recorded their most significant monthly drop since the 2008 financial crisis. The following months witnessed a delicate balancing act as the markets responded to shifting geopolitical tensions and economic indicators.

Despite concerns over inflation, rising interest rates, and the unforeseen regional banking crisis, the U.S. economy emerged as a bastion of resilience. Corporate profits saw an upward trajectory, and the technology sector, led by the "Magnificent 7" mega-cap tech stocks, spearheaded a notable stock market rally.

Investors underwent a transformative realization that the Federal Reserve and inflation, once perceived as long-term threats, were no longer menacing. The Federal Reserve concluded its rate-hiking campaign, and inflation exhibited a downward trajectory. A key contributor to the market's robust performance was the simultaneous decline in inflation coupled with sustained economic growth.

Developed world inflation, which stood at 7-7.5% a year ago, has receded to 3-3.5%. Spot energy prices saw a 30% drop, and problematic sectors like used cars experienced outright declines. The year-over-year U.S. consumer price index (CPI) inflation peaked at 9.1% in June 2022 but had already dropped to 6.4% by January 2023. This downward trend persisted throughout 2023, with CPI inflation reaching just 3.2% as of October. While still above the Fed's long-term target of 2%, the progress in curbing inflation allowed the central bank to ease off on rate hikes. In 2023, the Federal Open Market Committee implemented only four rate hikes of 25 basis points each, with no further increases since July.

Meanwhile, the third-quarter GDP report revealed a commendable 5.2% annualized growth for the U.S. economy, driven in part by the resilient U.S. consumer and the addition of approximately 2.5 million workers by U.S. companies, maintaining unemployment near 50-year lows.

Higher interest rates, while posing challenges to consumers and companies by increasing borrowing costs, did not impede economic growth and profitability. Notably, technology stocks, constituting nearly 55% of the S&P 500's gains, played a crucial role in the market's robust performance. The mega-cap tech-heavy NASDAQ 100 Index rallied by almost 55% this year outperforming its small and mid-cap counterparts by over 40 percentage points, in large part due to impactful cost-cutting measures and the newfound growth potential of artificial intelligence (AI).

Forex markets also witnessed notable movements. While the dollar saw a 2.5% decrease over the year, Japan's reluctance to raise interest rates translated to a 7% decline in the yen and a 3.5% drop in the yuan.

Beyond the conventional indices and currencies, certain markets and assets delivered standout performances and surprises. Japan's Nikkei, for instance, surged almost 20% in dollar terms and 28% in yen terms, marking its best year in a decade. Conversely, China grappled with property-related challenges, impacting oil prices, which declined by almost 8% over the year. Gold, often considered a safe-haven asset, experienced a +13% jump.