After getting off to a rocky start in October, all asset classes rallied strongly in November and December as the market anticipated a pivot in Fed Rate policy in the near future. The change in the expected path of rate policy was generated by continued positive news on the inflation front. As measured by the year-over-year change in the CPI, inflation in the US hit a low of 3.1%. No other asset class has felt the pain of the Fed’s fight against inflation more than bonds. Heading into the quarter, the US Aggregate Bond Index had experienced its second worst 3-year return in history, but with the positive news on the Fed’s fight against inflation, US Bonds delivered their best two-month period since the fall of 1982 to end the quarter up 6.8%. The story was similar for international bonds as most major central banks held their policy rates steady in the fourth quarter and there is anticipation that many of them will be cutting rates in the next year as well. The asset class returned 6% for the quarter.
In times of positive news, stocks rarely like to let bonds have the limelight, and this quarter was no exception. Across all cap sizes, US stocks delivered returns that we would be happy with for an entire year, with large-cap stocks up 12%, mid-cap stocks up 13%, and small-cap stocks up 14%. Returns in stocks overseas did not want to miss out on the party either. International developed market stocks returned 10.5% for the quarter while emerging market stocks produced a return of 7.8%. Lastly, returns in global real estate have been on quite a roller coaster ride the past couple of years, but with the change in expectations for interest rates, the asset class responded in a big way for patient investors. Global real estate led the way in 4th quarter with the S&P Global REIT Index returning 15.5%.
After a dismal 2022 where 94% of asset classes produced negative returns, disciplined investors were rewarded in 2023 for staying the course. All asset classes that we have in client portfolios produced a positive return for the year with returns ranging from 5.5% in US bonds to 26.5% in US large cap stocks. Just one more reminder that some of the worst returns in investing are often followed by some of the best returns.