How the markets fared in 2023

Last year turned out to be a very good year for the stock market, as the major indexes all posted returns above their historical averages.

For example, the large-cap S&P 500 finished the year up 24.2% at 4,770 — just a few dozen points below its all-time closing high of 4,797 set on Jan. 3, 2022. In just the fourth quarter, it was up more than 11%, and since Nov. 1, it has surged 13.8%. The S&P 500’s gains in 2023 more than wiped out the 19% loss in 2022.

The Nasdaq indexes performed even better, as the Nasdaq Composite jumped 43.4% in 2023, finishing the year at 15,011. That followed 2022, when it lost 33% of its value. The Nasdaq 100, which includes the 100 largest non-financial stocks on the Nasdaq, was up 53.8% in 2023 — the best year for the index since 2009.

In addition, the Dow Jones Industrial Average set a record in 2023, reaching an all-time high in the fourth quarter and finishing the year at 37,689, up 13.7% for the year. It fell 8.8% in 2022.

However, it wasn’t just large-caps that outperformed in 2023 as both the Russell 2000 small-cap index and the S&P 400 mid-cap benchmark recorded solid returns. The Russell 2000 gained 15.1% for the year after falling 21.6% in 2022. Meanwhile, the S&P 400 gained 14.4% in 2023, erasing the 14.5% drop in 2022.

Which sectors performed the best and worst

Just over 300 of the stocks on the S&P 500 were in positive territory last year, while the rest all posted negative returns. The far-and-away top performer in 2023 was semiconductor stock NVIDIA (NASDAQ: NVDA), which returned around 237%, followed by Meta Platforms (NASDAQ: META), which was up roughly 195%.

On the opposite end of the spectrum was Enphase Energy (NASDAQ: ENPH), a clean-energy stock, and FMC Corp. (NYSE: FMC), which makes insecticides and herbicides for the agricultural industry. They were both down about 48% on the year.

As the Nasdaq’s blowout performance would indicate, the technology sector was the best place to be last year, as it bounced back strong from a brutal 2022. More specifically, information technology stocks gained about 60% last year, led by the semiconductor industry, which posted an average return of 104% in 2023.

The communication services sector was the next-best performer, up about 58%, with interactive media and services stocks leading the way with an average return of 92%. Consumer discretionary was the third-best sector, up about 44% in the past year. Within this sector, retail, auto, hotels, restaurants, and leisure, and household durables outperformed.

The worst-performing sector last year was utilities, which was down approximately 10%. Energy was next, down 3% in 2023, while consumer staples dropped about 2% on the year. Within the broad consumer staples sector, personal care products got hammered, down 42% on average, while food products and tobacco were well into the red for the year.

Themes and catalysts

At the start of 2023, the inflation rate was 6.4%, and the federal funds rate was 4.25% to 4.5%. The Fed would continue to hike rates three times in 2023, with the last coming in July, when they went to the current 5.25%-to-5.5% range. The rate hikes seemed to have their intended effect, as inflation measured by the Consumer Price Index gradually fell, and by the end of 2023, it was at 3.1%.

The markets gained momentum in the last quarter of the year as the Fed decided to pause rate hikes at its last three meetings and indicated at its last meeting in December that it expected to reduce rates multiple times in 2024.

The year also featured a banking crisis the likes of which the country had not seen since the Great Recession, as three major banks collapsed, with declines generally triggered by liquidity concerns caused by high deposit costs, a run on deposits, and other factors. The industry did stabilize, and the larger banks, which are subject to more rigorous liquidity standards, held up relatively well.

However, the major investment theme for 2023 was the emergence of artificial intelligence, as investors seemed to flock to stocks that led the way in deploying this transformative technology.

AI will be a major theme again this year, as the trend will only gain momentum. The direction of inflation and interest rates, and their impacts on the economy, will also be something to monitor in 2024. Investors should watch out for the potential for a slowing economy, especially in the first half of the year, and monitor overvalued technology stocks.