Developed Markets Rebound Strongly
In the month of December, international developed stock markets returned 5.47%. Pacific ex Japan and Canada recorded returns of 9.02% and 6.77%, respectively. The U.K. and Japan lagged other markets for the month. International developed markets finished the year up 17.94% while the U.S. market gained 26.49%. The U.S. economy proved resilient in 2023, primarily due to strong consumer spending boosted by an unusual level of fiscal stimulus relative to current economic and employment conditions.
Emerging Markets Positive for the Year
Broader emerging markets posted a 3.57% return for the month. India and Mexico recorded returns of 8.10% and 9.46%, respectively. China and Korea lagged other markets for the month. Emerging markets finished the year up 8.64%. India’s economy continues to experience robust activity. China’s economy continues to be weighed down by weaker corporate capital expenditures and a shaky real estate sector. Near historic low valuations relative to the U.S. and international markets may help emerging market investors going forward.
Industrials and Material Outperform
Industrials and materials recorded returns of 7.29% and 6.94%, respectively, in December. Energy and utilities lagged other sectors this month. The information technology sector finished the year up 53.93%. Much of the rally in this sector has been driven by a small number of mega-cap technology companies.
DOMESTIC EQUITY FACTORS
Value Stocks Outperform
In December, value outperformed growth in the large-cap space and the small-cap space. Momentum recorded a return of 3.80%. Value stocks across the world continue to trade at large discounts relative to growth stocks. Value-oriented sectors such as energy, financials, and materials have underperformed this year after a strong performance in 2022.
FOREIGN EQUITY FACTORS
Growth Outperforms in International Markets
In the international developed markets, value underperformed growth in the large-cap space and small-cap space for the month. Momentum recorded a return of 3.57% while small-cap emerging market stocks posted a return of 4.34%. Value stock valuations are still very low relative to growth stocks in both international developed and emerging markets, which is consistent with the US market.
Savers Benefitting from Higher Interest Rates
In December, the three-month Treasury bill index returned 0.47%. From the beginning of 2022 through the end of December 2023, the annualized interest rate on the 90-day Treasury bill increased from 0.08% to 5.40%. Savers and retirees are now getting paid much more interest. Real interest rates are positive with the CPI increasing by 3.12% over the past year through the end of November.
DISINFLATION DEFLATIONARY HEDGES
Long-Duration Fixed Income Investments Continue to Rally
The returns of deflationary hedges were positive for the month. The Bloomberg Barclays U.S. Agg Bond Index returned 3.83% for the month. Long-term government bonds and long-term municipal bonds recorded sizable returns of 8.59% and 3.45%, respectively, as investors expect the Federal Reserve to cut interest rates in 2024. Catastrophe bonds finished the year up 19.69%. Insurance-linked securities like catastrophe bonds are benefiting from higher premiums that insurance companies are demanding from buyers.
INFLATION SENSITIVE INVESTMENTS
Real Estate Rebounds
Inflation-sensitive investment returns were mixed for the month. U.S. and international real estate returned 10.02% and 8.95%, respectively, in December. WTI crude oil and U.S. natural gas were down for the month. The Bloomberg Commodity index posted a return of -2.69%. Gold bullion finished the year up 14.59% even though short-term interest rates and real yields continued to rise. Many emerging market central banks have been steady buyers of gold bullion in recent years. As geopolitical risks increase and become more interconnected, gold bullion may serve as a safe haven.
U.S. Dollar Mixed Versus Other Currencies
Over the past three months, the U.S. dollar depreciated against most other major currencies except the Indian Rupee. Over the past year, the U.S. dollar strengthened against the Japanese Yen, Indian Rupee, and Chinese Yuan. The continuation of U.S. fiscal and trade deficits may weigh on the U.S. dollar in the medium-term to long-term. Gross federal debt to GDP stands at 120% and is forecasted to increase throughout the decade. In addition, the fiscal deficit is 6.4% of GDP at a time of economic expansion and low unemployment.
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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