After a year of ups and downs on financial markets, 2023 ended with very good return, both for stocks and bonds. The reason? A welcome drop in pressure on several dimensions: inflation is finally starting to decline and financial markets anticipate central banks to make rate cuts during 2024. Let's look back at the significant events of 2023 and this magnificent end-of-year rally which led to a total return of +16,6% for stocks and of +6,3% for bonds.
Already chilled by 2022, investors are starting 2023 stunned by a bank bankruptcy which temporarily causes the stock market to lose 7%. Silicon Valley Bank, a Californian bank popular among tech start-ups, is seeing its solvency undermined by the rate increase. This tension revives memories of the 2008 crisis and pushes SVB clients to massively withdraw their liquidity. A wave of panic is overwhelming American savers, spreading withdrawals to other institutions in the country. Fortunately, the safety nets put in place since 2008 protect the U.S. and global banking system from contagion. It took only 2 months for the stock market to regain color.
After the surge in energy prices due to the conflict in Ukraine and the European embargo on Russian gas, winter 2023 is finally going off without a hitch. Mild temperatures, the sharp drop in consumption and gas reserves accumulated by all European countries make it possible to stabilize prices. At the end of 2023, the price of gas is three times lower than it was a year earlier. This reduction is a relief for the financial markets which will largely contribute to bringing inflation back to an acceptable level.
In the middle of the year, inflation, which had peaked in October 2022 at more than 12%, finally begins to normalize under the combined effect of rate increases and the fall in energy prices. This suggests a stabilization or even a reduction in rates by central banks. Anticipating the beneficial effects of the upcoming change in monetary policy, stocks and bonds start recovering as of June. The Fed raises its key rate for the last time in July 2023, while the European Central Bank waits until September. It takes only 2 months for the world stock markets to gain 7% and come for the first time of the year close to the peak.
The European Central Bank's key rate had begun 2023 at 2,5% and to gradually reach 4,5% by mid-September in an effort to curb inflation. If this drastic increase in rates initially causes bonds to lose up to 5%, they end the year with a nice increase of 6% and also regain their raison d'être: a low-risk financial product which offers a stable return, very useful to strenghten an investment portfolio. After years of rates close to zero, bonds are now becoming more attractive again.
While the war is bogged down in Ukraine, the world is helplessly watching a bloody resumption of the Israeli-Palestinian conflict, centered in the Gaza Strip and its periphery. Despite the seriousness of the situation and the intensity of the conflict, the markets remain impassive, with stocks even gaining 2% in the first days. This lack of reaction is due to the fact that, just as with the Ukrainian conflict, the weight of the region on the world stock market is very small and the risk of contagion from the conflict is limited.
The European Union is experiencing growth levels close to zero, or even negative in Germany, but the predicted recession has not materialized. Across the Atlantic, growth is even largely positive at +3,1% of GDP over the year, defying predictions and benefiting the American stock market. Ultimately, the “soft landing” scenario on which central banks were banking seems to be materializing. The recession has been avoided, the employment rate has reached record highs and inflation is finally normalizing around 3%.
We had to wait until the end of December for the markets to finally decide to cross their historic ceiling of January 2022. On 4 occasions, however, (April and August 2022, July and September 2023), we had come close to the fateful threshold... but the markets remained cautious, strained by the still too high levels of inflation and interest rates. The end-of-year euphoria will finally overcome the last, essentially psychological, barriers to market growth. After a fantastic rally that began in November, the year ended very positively with a total return of +16,6% for stocks and +6,3% for bonds.