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Much like the overall market, factors reversed course in 2023 with most broad categories performing opposite of what they did in 2022. While two years ago, safety was a virtue, in 2023, the riskier the better.

Over the entire history of this study, the momentum plays of our “Dreams” and “Nightmares” have worked both ways. This was not the case in 2023, however, as the fortunes for both groups (based on 2022 performance) U-turned in a considerable way.

At the start of a new year, we look back at the sector shifts that transpired throughout 2023—mainly going from commodity and defensives to start 2023—to growth and cyclicals as we begin 2024.

The story of the year was the Magnificent 7. Even with a lackluster December, the largest seven firms produced an average return of +111% in 2023. Advances in those companies added $5 trillion in market cap and were responsible for just under two-thirds of the S&P 500’s overall gain.

Royal Blue Growth (+40%) led all of our style boxes in 2023. However, this mega-cap proxy still hasn’t recovered all of its losses from 2022.

Our preferred earnings measure, five-year normalized EPS, has grown from $145 to $171 over the last two years. The S&P 500’s Normalized P/E multiple has dipped from 32.9x to 27.9x since the end of 2021. Those two figures are good for the 94th and 81st percentiles, respectively, in our 1995-present data set.

With the books closed on Q3-23 reporting, the ratio reads 1.16—right in the middle of the depressing range captured over the past two years. This equal-weighted all-cap vignette is still flashing a warning sign about companies’ ability to grow their bottom lines.

While recession risk remains high, financial conditions have eased considerably, undoing all of the tightening seen in 2023.

Given how many potential political and geopolitical hotspots there are at present, it might be a bit presumptuous to think 2024 will be a typical year. Politics and geopolitics are the most underpriced risk for 2024.

The S&P 500 index painted a picture of a runaway market in 2023, but for a lot of non-equity markets, 2023 was a year of round trips.

In the theme that’s reminiscent of all but a couple of the last 15 years, the optimal strategy for equity managers and asset allocators in 2023 was the same: Buy the S&P 500, and then hit the links.

There’s a huge difference between having an awareness of the myriad calendar phenomena impacting the stock market, and actually acting on them.

The shortfall of 12.7% in the Equal Weighted S&P 500 compared to the Cap-Weighted version was its second-worst annual showing. Thanks to the lagging action, the valuation profile for the average Large Cap stock has improved.

After the S&P 500 lost 25.4% into its low in October 2022, the fundamental characteristics surrounding the market at that time were hardly the type that pave the way for a multi-year bull market. We’ve therefore maintained that even the most rabid bulls need to temper their expectations. 

The S&P 500 upswing from its October 2022 low reached +34% at the 2023 high point on December 28th. That’s roughly ten percentage points behind the average gain at the same point of the past 15 major advances since 1957.  Still, it’s a solid gain.

There are reports that 40% with student loans did not make an initial payment when installments resumed in October. Meanwhile, among seniors aged 65-79, the share with a mortgage rose to 41% in 2022, up from 24% in 1989, while the percentage of those aged 80+ with a mortgage increased from 3% to 31% during the same time! 

The S&P 500’s inflation-adjusted gain over the last twelve months is 21%, far above any previous reading seen on the doorstep of a U.S. recession. In other words, the wealth effect—a major contributor to the 2021-2022 inflationary spiral—is back again.

Remember the nickname for retired San Antonio Spurs star Tim Duncan? “The Big Fundamental.” The stock market itself is a big fundamental—and that’s probably truer now than in past cycles, since market capitalization relative to U.S. GDP is larger today—with the exception being the most extreme phase of the post-COVID mania.

Speculating on the link between style performance and interest rates is a favorite pastime of factor aficionados, but 2023 provided a real-time laboratory to evaluate those ideas. We examined factor returns during the interest rate swings to uncover some empirical insights into this important relationship.

Whenever a basket of stocks with the market heft of the Magnificent 7 shows a price gain of 111% in a single year, the valuation alarm-bells ring loud. Is this gain the result of a mania for all things AI, or could the move be justified by equally magnificent fundamentals?