December serves as a reminder that it is often best to ignore market volatility. The market volatility that first appeared in August eventually forced most categories of stocks into negative territory for the year. Then, near the end of October, a rally began. That rally, which continued through December, boosted major categories of stocks by double digits, including several percentage points in December alone. Not to be left out, the bond market rose by 9% from its October low.
Why did financial markets deliver such favorable results in December? The same reason they did last month: falling long-term interest rates. Investors now expect a loosening of monetary policy and a soft economic landing with no immediate recession. Those expectations lifted U.S. bond market returns to nearly match those of the U.S. stock market for the month. Some specifics: the yield on the 30-year U.S. Treasury Note fell from 4.54% to 4.03%. That may not sound like much, but it was enough to propel long-term U.S. government bonds to a 8.6% monthly return.
Financial markets brought especially nice gifts to the owners of U.S. small cap stocks which surged over 12% in this month. Focusing on December alone, however, neglects the magnitude of the small cap trend. As measured by the Russell 2000 index, small cap stocks climbed 24% since their late October lows! In a mere two months, small-cap stocks went from one of the worst types of stocks to become the second-best broad category of stocks this year.
Sitting alongside strong returns in financial markets is a remarkably strong U.S. economy. Inflation continues to moderate. The U.S. job market eases while remaining strong. The most recent GDP report measured economic growth at an astonishing 4.9%. These factors support the belief that the Fed will deliver a coveted soft landing, not skidding too far off the side of high inflation nor turning too sharply into the side of economic contraction. With a soft-landing looking more and more probable, one can move into the new year with a lot to feel good about.
Our Bell team wishes you warmth and kindness in 2024.