Follow the Yields

February 05, 2024


  • A tumultuous 2023 unfolded with economic challenges, regional bank issues, inflation concerns, and geopolitical tensions. Despite the turmoil, the U.S. stock market defied odds, reaching higher ground. The turning point came when the Treasury Department shifted to short-term debt, causing a rally and a significant drop in 10-year Treasury yields.
  • Along with falling yields, the market surge at the end of 2023 was triggered by easing financial conditions and the Fed signaling a halt in interest rate hikes. Real Estate Investment Trusts (REITs) were the primary beneficiaries, returning around (+18.0%) in Q4 and (+11.3%) for the entire year.
  • Beyond major indexes, all U.S. size and style indices rallied in the quarter. Small-cap stocks outpaced large caps, and growth outperformed value among large caps but underperformed among small caps. Despite a gloomy economic outlook at the start of 2023, the U.S. not only avoided a predicted recession but achieved a robust 2.5% economic growth.
  • 2024 started strong, with the S&P 500 hitting an all-time high. Optimism at the start of 2024 was fueled by lower inflation data and expected interest rate cuts. However, Chairman Jerome Powell's remarks on rate cuts tempered expectations. Robust job growth and low unemployment present a dilemma for investors, as the potential for increased wages raises concerns about inflation increasing once more.

2023 Recap

2023 had it all. Economic doom and gloom, regional bank issues, inflation concerns, elevated interest rates, an artificial intelligence boom, war and geopolitical tension, a stock market driven by a select few earlier on in the year, and a fixed income market off its rocker. Nevertheless, the U.S. stock market made its way higher despite all of the news thrown in investors’ faces. Look no further than the chart presented below.

Source: Avantis Investors. Data from 1/1/2023 – 12/29/2023.

Let’s take a step back though. On October 27th, the S&P 500 Index was slouching toward a 4,100 level, down just over 10% from the July high, and the 10-year Treasury was yielding 4.83%. In the following 10 weeks, the S&P 500 Index blasted 16% higher on a price basis, and the yield on the 10-year Treasury fell by over 95 basis points, an enormous drop.

What caused the market rally and drop in yields?

The turning point occurred when the Treasury Department decided to issue short-term debt instead of longer-term debt to fund future liabilities. This, in turn, created more demand for Treasury notes and bonds, driving prices up and yields down (the classic inverse relationship). As 10-year Treasury yields dropped back below 4%, financial conditions eased for consumers and businesses. Furthermore, the Fed signaled it was done raising interest rates, and as a result, stocks surged and didn’t look back.

REITs (publicly traded real estate) were the largest beneficiary of falling yields during the fourth quarter, returning just under (+18.0%) and up (+11.3%) for the full year. Solid gains in November and December also boosted the U.S. stock market, as represented by the S&P 500, returning (+11.7%) in Q4 and over (+26.0%) for all of 2023. On the fixed income front, high yield bonds rose over (+7.0%) in the quarter, and U.S. investment grade bonds, as represented by the Bloomberg US Aggregate Bond Index, increased (+6.8%) as yields fell.

Source: Bloomberg. Nova R Wealth. Q4 2023 data from 9/30/2023 – 12/31/2023 and YTD data from 1/1/2023 – 12/31/2023; see important disclosures at the end of this material.

Beyond the broad market indexes, all U.S. size and style indices rallied for the quarter. Small-cap stocks outpaced their large-cap peers (+2.34%), while growth outperformed value among large caps (+4.66%) and underperformed among small caps (-2.51%).

Delve into the U.S. economic forecast at the start of 2023, and you'll find a gloomy outlook with estimates for real GDP growth languishing at a meager 0.5%.1 A narrative of impending recession painted the canvas by seasoned economists. Yet, the unfolding tale told a different story. By the close of the year, the U.S. not only evaded the forecasted recession but defied expectations, boasting a robust 2.5% growth.2

The unexpected surge in economic growth was akin to a masterstroke, leaving forecasters scratching their heads. A crucial factor was the resilience of the American consumer, entrenched in their spending habits. This not only bolstered economic growth but also propped up corporate earnings estimates, defying the dire predictions that loomed large at the beginning of the year. It’s truly amazing how expectations and what really happened can be so unpredictable.

A Bucket of Cold Water

U.S. stocks started 2024 mostly how it ended. Strong. In fact, the S&P 500 Index hit an all-time high on a price basis January 19th. The last high for the index occurred on January 3, 2021, so it took over two years to get back to where we were. From a historical perspective, the time to get back to breakeven was slightly longer than average for non-recessionary bear markets.

Optimism and animal spirits for 2024 has been a combination of lower inflation data and expected interest rate cuts. The core personal expenditures index—the Fed’s preferred inflation gauge—fell to a low of 2.9% in December.3 On a six-month annualized basis, the reading was up 1.9%, below the 2% Fed target for a second month in a row.

During his press conference on January 31st, Chairman Jerome Powell addressed the improving inflation situation, but dismissed the assumption that the federal funds rate will be reduced in March. Yet, just before the press conference, there was a 41% probability the Fed was going to cut rates in March, according to Bloomberg. After Powell spoke, chances of a cut in March faded into the abyss.

Stronger economic news came out just after the Fed meeting at the beginning of February. 353,000 jobs were added in January, compared to predictions of 185,000, while the unemployment rate stayed at 3.7%. Although this is good news, investors see this as a bit of a dilemma.

On one hand, robust job growth and low unemployment increase the chances of a soft landing, characterized by low unemployment and inflation. On the other hand, surpassing job growth expectations and maintaining low unemployment could potentially lead to increased wages, stirring concerns about a resurgence of inflation.

The evolving dynamics of economic data, geopolitical events, and an upcoming presidential election are sure to shape the narrative for the rest of the year. Nevertheless, it's crucial to remember that, much like the barrage of news headlines that inundated us in 2023, these unfolding stories should not dictate your long-term financial plan. While staying informed is important, the essence of sound financial planning lies in a steadfast commitment to your overarching goals and strategies.

  1. Bloomberg.
  2. Bureau of Economic Analysis.
  3. Bureau of Economic Analysis.

The FTSE Nareit Equity REIT TR Index measures the performance of REIT performance indexes that spans the commercial real estate space across the US economy. It contains all Equity REITs not designated as Timber REITs or Infrastructure REITs. The index is market-capitalization weighted.

The Bloomberg US Aggregate Bond TR Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.


This presentation is for educational and illustrative purposes only. It is not intended to offer or deliver investment advice in any way. Past performance is not indicative of future results. The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Any index presented does not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index.

Nova R Wealth, Inc. is a registered investment advisor with the U.S. Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the adviser or investment adviser representative has attained a particular level of skill or ability. Nova R provides investment advisory and related services for clients nationally. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Nova R Wealth, who reserves the right at any time and without notice to change, amend, or cease publication of the information contained herein.