The year 2023 turned out to be a banner year for Wall Street, defying the odds and reaching new heights despite lingering recession fears. Powered by a resilient American consumer, easing inflation, and a strong job market, stocks staged a massive comeback from the battering of 2022.
The S&P 500 gained 24% for the year, notching its best annual performance since 2019. The Dow Jones Industrial Average surged nearly 15%, landing firmly in the green after a rough 2022. But the real showstopper was the tech-dominated Nasdaq, skyrocketing 43% in a stunning recovery for growth stocks after last year’s shellacking.
Bucking the Fed’s Rate Hikes
Just twelve months ago, the prognosis looked dire. The Federal Reserve had embarked on its most aggressive tightening campaign in decades to tame runaway inflation, raising interest rates at a breakneck pace. Higher rates typically spell trouble for stocks by slowing economic growth and corporate profits.
Yet Wall Street climbed the proverbial “wall of worry,” confounding those who predicted a recession. The American consumer, the backbone of the economy, kept spending through it all. Job growth remained robust, with unemployment dipping to 3.7% by year’s end.
Meanwhile, inflation steadily eased from a 40-year high of 9.1% in June to just over 3% in November, allowing the Fed to temper its hawkish stance. The central bank pivoted from jumbo 0.75 percentage point hikes to a more modest 0.5 point increase at its December meeting.
The improving inflation outlook was music to investors’ ears, signaling the Fed’s painful monetary medicine was finally taking effect and an economic “soft landing” was still possible. Stocks rallied on hopes that rate cuts may even be on the horizon in 2024.
The Return of the ‘Magnificent 7’
After leading the market higher for years, Big Tech names were mercilessly dumped in 2022’s broad sell-off, with some megacap darlings like Nvidia and Meta Platforms plunging over 50%.
But the tech titans mounted a roaring comeback in 2023, reclaiming their leadership mantles and pushing the Nasdaq to new heights. Dubbed the “Magnificent 7”, Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta posted stellar triple-digit returns, vastly outperforming the broader market.
Nvidia leapt an astounding 246%, Meta surged 184%, and Tesla jumped 130% as investors rotated back into high-growth stocks. The resurgence reflects optimism that these innovative giants have the fundamentals to deliver strong profits even in a higher rate environment.
Meanwhile, Apple retained its title as the world’s most valuable company, crossing the historic $3 trillion market cap threshold in January before pulling back. At 47%, its 2023 returns trailed the sizzling tech pack but handily beat the S&P 500.
Beyond the Big Names
But it wasn’t just the mega-cap tech leaders that shone in 2023. Some lesser-known mid-cap stocks delivered truly eye-popping returns.
Language learning app Duolingo was Wall Street’s top performer for much of the year, with shares rocketing as much as 400% before settling around 220% higher. The pandemic darling kept up its scorching growth in 2022, with sales up 45% and two straight profitable quarters since going public in 2021.
Beaten-down retailer Abercrombie & Fitch staged a shocking turnaround, closing 2023 a whopping 274% higher for its best year on record. Investors cheered the company’s accelerating sales growth, up 30% in its latest quarterly report.
Another surprising standout was ImmunoGen, a small-cap cancer drug developer virtually unknown on Wall Street. The stock delivered a staggering 522% return for the year before agreeing to a $10 billion buyout by pharma giant AbbVie in November.
The Remarkable Resilience of the US Consumer
Experts fretted high inflation would crush consumer spending in 2023. But American shoppers have proven remarkably resilient, continuing to propel economic growth even as prices rose.
Consumer spending makes up about 70% of US GDP. Despite an 8.5% increase in credit card rates, surging rents and grocery bills, and plummeting savings rates, households keep footing the bill.
In fact, consumer spending grew at a healthy 2.3% annual pace in the third quarter, helping GDP grow 2.9% for the period. Americans still have over $2 trillion in excess savings leftover from pandemic stimulus, giving them a cushion to maintain spending for now.
The red-hot labor market is also supporting consumers. Over 4.5 million jobs were created in 2023, building on robust gains in 2021 and 2022. Unemployment remains near a 50-year low at 3.7%, keeping wages elevated. Average hourly earnings are up 5.1% over the past year, helping workers afford costlier essentials.
But many economists warn households are drawing down savings and taking on debt at an unsustainable pace. If job losses mount or incomes decelerate, consumers may pull back, potentially tipping the economy into recession.
The Strong Dollar’s Double-Edged Sword
The U.S. dollar’s powerful rally was one of 2023’s biggest financial storylines. Buoyed by aggressive Fed rate hikes, the greenback gained over 8% on a trade-weighted basis — its best performance since 2015.
After hitting its highest level in two decades in September, the dollar finally peaked and slowly drifted lower into year-end as markets priced in a less hawkish Fed. But it still booked its best annual showing since 2020.
The soaring dollar was a double-edged sword for the U.S. economy. On one hand, it reflected underlying economic strength and central bank credibility at a time when much of the world was struggling. This supported demand for dollar-denominated assets like stocks and Treasurys.
But it also hurt American multinational companies, making their exports more expensive overseas and pressuring profits. At the same time, it made foreign goods cheaper in the U.S., exacerbating the trade deficit.
Treasury Yields Pull Back from Near-Term Highs
After surging to multiyear peaks in 2022, Treasury yields eased from those lofty levels as policymakers talked down recession worries.
The yield on the 10-year note briefly topped 3.5% in November, its highest since 2011, reflecting the Fed’s aggressive tightening campaign. But yields slid below 3.7% by year-end as investors bet the worst of inflation had passed.
The 2-year Treasury yield, which is more sensitive to imminent rate moves, peaked just shy of 5% in mid-2022. But it too fell back below 4.5% in the year’s homestretch as markets priced in slower hikes from the Fed.
Falling Treasury yields may signal bond investors expect an economic slowdown or even recession in 2023. But they also imply confidence that inflation pressures are abating, allowing for less aggressive Fed policy.
Moderna and Pfizer Plunge as Vaccine Demand Evaporates
Two of Wall Street’s pandemic darlings, Moderna and Pfizer, crashed back to earth in 2023 as demand for their COVID vaccines unexpectedly dried up.
Moderna plummeted 44% for the year, while Pfizer plunged by a similar margin, marking their worst annual returns ever as publicly traded companies.
The historic mRNA vaccines were hailed as scientific marvels upon their rollout, conferring over 90% effectiveness against earlier coronavirus strains. Billions of doses were snapped up in 2021 and 2022 under advanced purchase agreements.
But as immunity from prior infections increased globally, urgency around vaccination has waned. Moderna slashed its 2023 vaccine sales forecast by up to $3 billion. Meanwhile, Pfizer expects its 2023 vaccine revenue to drop 64% from the 2022 bonanza.
Both companies are racing to roll out new vaccines targeting the latest Omicron strains. But with most people already having some immunity, demand is uncertain. The companies are touting experimental vaccines beyond COVID, but none have gained regulatory approval yet.
After pulling in over $56 billion in combined COVID vaccine sales in 2022, Moderna and Pfizer are learning to live without the extraordinary boon. With shares having crashed back below pre-pandemic levels, the market euphoria around their mRNA platforms has evaporated.
Dollar General Stumbles as Low-Income Shoppers Feel the Pinch
While consumers broadly proved resilient in 2023, it was a different story for dollar stores catering to lower-income shoppers. Dollar General, the largest US dollar chain, endured a miserable year, tumbling 45% for its worst 12-month performance ever.
Having shrugged off past recessions, Dollar General was caught off guard as its core base of budget-conscious shoppers started cutting back. Surging food and gas costs forced many to trim non-essential purchases.
At the same time, Dollar General struggled with inventory excesses, hiring challenges, and new competition from revitalized rival Dollar Tree, which began selling more $1-$10 items in hopes of winning over its customers.
In October, Dollar General took the dramatic step of re-appointing former CEO Todd Vasos out of retirement to shore up the company. Current CEO Jeff Owen was ousted after just two years at the helm.
The return of Vasos signaled major changes could be afoot. Dollar General may slow openings of new locations, cut costs, or tweak merchandise assortments to cope with the sales slump. With shares in freefall, the chain faces pressure to prove it remains a safe haven in difficult times.
Looking Ahead to 2024
As Wall Street breaks out the champagne to toast 2023’s banner returns, undercurrents of concern lurk beneath the surface.
The Fed’s war against inflation is far from over. While price increases have eased, core inflation remains well above the central bank’s 2% target. Multiple Fed officials have telegraphed interest rates could stay elevated through 2024 or even 2025.
With households and businesses addicted to cheap money after years of near-zero rates, the full impact of pricier financing has yet to be felt. Many expect a recession in the coming year as rising borrowing costs catch up to consumers and companies.
Geopolitical tensions also threaten to boil over. Russia’s war in Ukraine shows no signs of abating. Relations between the U.S. and China have deteriorated to their lowest point in decades. And turmoil in the Middle East adds another layer of uncertainty.
For investors enjoying 2023’s windfall, next year seems likely to offer a harsher reality check. But as this past year proved, even the most dire predictions can miss the mark. If the resilient American consumer continues powering growth, perhaps the bulls can stay on the ride a while longer.
