Nick Rummell

MANHATTAN (CN) — Stocks rallied in 2023, as investor momentum picked up with the shrinking threat of recession, diminishing inflation and the increasing likelihood of a soft economic landing.

The successes of 2023 came in stark contrast to 2022, when equities saw their worst year since the start of the Great Recession. Conversely, this year all major U.S. indices barged ahead, with two of the three setting new records.

By the closing bell Friday, the last of 2023, the Dow Jones Industrial Average had gained 4,542 points for the year, roughly a 13% increase. The S&P 500 netted 930 points, a new record for the index and a 24% increase for the year, while the Nasdaq rocketed up 4,545 points, a 43% yearly increase.

Analysts have celebrated the market wins but remain worried that Wall Street is too bullish and not negative enough.

“Momentum remains overbought but bullish as the rally broadens out,” said Adam Turnquist, chief technical strategist for LPL Financial, adding that while “extremely overbought conditions raise the odds of a temporary pause or pullback, longer-term returns have been positive and above average based on comparable periods.”

Tom Essaye of the Sevens Report likened the market in 2023 to rough sailing. “I can’t help but feel as though all of us in the markets are in a proverbial canoe and the investing public is violently leaning to one side of the canoe and then the other, causing it to nearly tip each time,” he wrote in an investor’s note.

The main driver for market wins has been the Federal Reserve, which continued to raise interest rates in the early part of the year by a total of one basis point but paused during its last three meetings. The current federal funds rate sits at 5.25% to 5.5%.

The Fed hasn’t yet brought inflation down to its 2% goal, but experts still believe the central bank will begin cutting rates sometime early next year and will finish 2024 with a 4.5% interest rate.

Essaye wrote that many believe the Fed will slash interest rates about six times next year, believing inflation will soon “go into some sort of freefall” and the S&P 500 may hit 5,000 points. “But I’ve been in this industry long enough to know that when everyone seems to be leaning on one side of the proverbial canoe, it pays to move to the middle,” he wrote.

Another positive driving markets has been the drop in oil prices, with barrels of crude on the West Texas Intermediate selling for roughly $77, the lowest since the summer.

U.S. oil production also hit a record high this year with an estimated 13.3 million barrels a day of crude, while OPEC has said it would cut production by 2.2 million barrels per day in early 2024.

The job market remains strong, with 2.55 million jobs gained so far in 2023; December’s job data have not yet been released, and the job reports from October and November have not yet been finalized.

While this is about 2 million fewer jobs than the nearly 4.5 million jobs gained in 2022, it still shows remarkable strength well after the pandemic recovery has finished.

Unemployment claims have remained mostly consistent this year, with new claims averaging about 200,000 per month, except for a spike in June, and the unemployment rate has risen slightly from 3.5% in the beginning of the year to 3.7% in the most recent report.

Gross domestic product also fared relatively well in 2023, with the U.S. economy growing by an estimated 2.4%. Last year GDP increased by 2.1%.

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