Fourth-quarter market review with Jim Smigiel

- Hi, I'm Jim Smigiel, SEI's Chief Investment Officer, and over the next few minutes, I will provide an overview of the global financial markets and our perspective on them. 

As 2023 winds down, it will be remembered as a strong year for performance, defying expectations for a recession, overcoming a banking crisis, looking past conflict in the Middle East, rising interest rates, and a slowing economy in China. U.S. equities represented by the S&P 500 had a strong fourth quarter and a strong year posting gains of 11.69% and 26.29% respectively. Global markets followed suit with the MSCI ACWI Index rising 9.75% for the quarter, and 15.62% for the year. Stocks began the fourth quarter with a continuation of their downward trajectory from the third quarter, hitting a low point in late October before they reversed course. The S&P 500 then notched nine consecutive weekly gains to end the year just short of a record high. A fever pitch of excitement over artificial intelligence and high expectations for interest rate cuts in 2024 were the key performance drivers. While the results are impressive, we continue to urge caution when it comes to stocks in the short term. 

A handful of companies, the so-called Magnificent 7, were responsible for a disproportionate amount of the S&P's returns in 2023, largely propelled by the promise of artificial intelligence. These seven companies returned in the neighborhood of 100% compared to little more than 12% for the more than 490 remaining companies in the index. When it comes to the Magnificent 7, we've seen this movie before, whether it be the tech bubble or the NIFTY 50, it is rare for market leaders to maintain their dominance over the long term. Of equal note, the fourth quarter marked a period of pronounced moves in bond yields. The benchmark 10 Year Treasury yield rose to 5% in October, a level not seen since 2007, driven by expectations for a higher, for longer rate environment and concerns over the federal deficit. Since then, the 10 Year Treasury yield reverse course and has trended downward. This sharp decrease in rates provided a tailwind for bond investors as bond prices rise when interest rates fall. This dynamic made November the best month for U.S. bond performance as represented by the Bloomberg US Aggregate Bond Index since the 1980s. 

As we close the book on 2023, we can safely say that it was a very good year for financial markets. It was also a year that markets defied expectations. We think 2024 could defy expectations as well. Investors are counting on inflation to return to 2% or less, central banks to meaningfully cut interest rates, and equities to deliver double digit earnings growth. In terms of economic projections, we would argue that these expectations go beyond the soft landing label and fit more into a perfect landing category. With all of this in mind, we remain skeptical. Taming inflation may be more difficult than expected, and we see a probability that interest rates rise rather than fall. In the meantime, both equity and fixed income markets seem priced for perfection. 

Given the potential for a less than perfect landing, we are taking a more cautious view, emphasizing diversification in our portfolios, generally seeking a more neutral allocation to long duration bonds, and anticipating a slight increase in our tilt towards value stocks. We like to think of it as a sensible positioning in pursuit of a happy New Year. 

On behalf of everyone at SEI, thank you, as always, for your trust and confidence.