91��̳

Markets continued their rally in December. U.S. large-cap stocks (S&P 500) rose 4.54% and small caps (S&P 600) gained a remarkable 12.80%. Emerging-market stocks (MSCI Emerging Markets) rose 3.91%, while developed-market international stocks (MSCI EAFE) gained 5.31%. The Bloomberg U.S.��Aggregate Bond Index, a broad measure of bonds, climbed 3.83% as expectations for future interest rates fell (bond prices rise when interest rates fall).*

��

WHY IT HAPPENED

Positive news about both the economy and interest rates fueled December’s market gains, which helped the S&P 500 end 2023 near its previous peak in early 2022. ��

Once again, expectations around interest rates were a primary driver. Economic news suggested that inflation may be tamed soon, easing pressure on the Federal Reserve to raise interest rates or keep them high. The best outcome would be lower inflation with continuing economic growth, also known as a “soft landing.” Markets seemed to think this an increasingly likely scenario after widespread forecasts of a 2023 recession weren’t realized.

Economic data released in December showed employment gains were slowing to a pre-pandemic pace while still supporting wage gains and healthy consumer spending. Despite this, inflation continued to trend down. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures Index, actually fell by 0.1% from October to November and, excluding volatile food and energy prices, it rose by only 0.1%. It’s important not to read too much into one month’s numbers, but inflation is heading toward the Fed’s target 2% level.

The Fed kept interest rates steady at its December meeting, recognizing that inflation had eased in its post-meeting statement. More importantly, the Fed signaled in its economic projections that its rate hike campaign may be over, with rate cuts possibly in the offing in 2024. But there remains uncertainty about the extent of any rate cuts and their timing.

All told, December’s rally helped the S&P 500 post a 26.29% gain for 2023 while the Bloomberg U.S.��Aggregate Bond Index rebounded with a gain for the year of 5.53% from its 13.01% decline in 2022.*

��

What it means for you

Economic strength and falling inflation in 2023 defied many forecasters’ expectations that there would be a recession in 2023 and that inflation would not fall without more economic pain. These forecasts were simply wrong. This isn’t to say that there won’t be a recession in the future, but that the economic outlook is always uncertain, so you shouldn’t pay too much attention to predictions. If you had stayed out of the market last year, you would have missed 2023’s rally.

Last year’s unexpected gains not only remind us of the difficulty of timing the markets but also of the wisdom of staying invested. We saw 2023 gains in both U.S. stocks and bonds but also in international developed markets.

A diversified portfolio will not give you the returns of any single index, but instead, captures returns from a range of asset classes and helps you reduce your investment risk. This is why we believe a diversified portfolio is the best approach to help you achieve your long-term financial goals.��

��

*Index return data provided reflects “total return,” which includes income generated by securities held within the index, such as dividends and interest. Because it includes income, index total returns can differ from index price returns that only consider prices.