This was the one contraction that crowded them all out in a year full of big numbers, with strong stock gains and even more fantastic cryptocurrency growth.

Inflation, the scourge of the global economy, has softened this year.

It’s still relatively high, especially after years of low inflation that everyone enjoyed before US inflation topped 9% two summers ago. But it’s cooled enough to make investors look ahead to 2024, when interest rates may be falling rather than rising.

Globally, inflation is estimated to have fallen to 6.9% from 8.7% last year.

Surprisingly, the US economy also held up throughout the year despite early fears that a recession might be imminent. For a while, the worry was even that the economy might be too strong, which could have increased inflationary pressures and forced the Federal Reserve to keep interest rates high for longer.

This led to contradictory moments when Wall Street was actually happy about weaker economic reports, as long as they were not too weak because they supported the possibility of a perfect economic landing engineered by the Fed. The goal was for the economy to slow down enough to overcome high inflation but not so much that it would fall into recession.

Interest rates were the primary factor driving the stock market in 2023. The Fed aggressively raised short-term rates in an attempt to fight inflation by cooling the economy. In the bond market, long-term Treasury yields rose sharply over the summer, reducing the attractiveness of stocks and also acting as a drag on the economy. Treasury yields began to decline after Halloween.

Now that the economy is still growing and expectations for a rate cut in 2024 are rising, investors have rushed to get ahead of moves that could act as steroids for all types of markets. US stock prices have rebounded from a terrible 2022, which was the worst year for Wall Street since the dot-com bubble burst two decades ago.

Much of Wall Street’s run was driven by just a small group of stocks, but breadth was better across the board. Stock markets in America, Europe, and Asia rose.

However, higher interest rates have left their mark, especially on the US housing market. Sales of previously occupied homes in the US fell in October to the slowest pace in more than 13 years.

Inflation and the global economy

Here’s a look at some of the impressive numbers that shaped global financial markets in 2023.

Due to falling gas prices, inflation in the US remained almost unchanged in November at 3.1%. But the main price pressures – from apartment rentals, restaurant meals, car insurance, and many other services – remained stubbornly high.

In June 2022, inflation peaked at 9.1%. The Federal Reserve’s target level is 2%.

Overall inflation in the European Union was 2.4% in November, a far cry from the 10.6% peak in October 2022. Energy prices fell by 11.5% compared to the same month last year. But food inflation remains stubbornly high at 6.9%.

Argentina’s inflation rate is a staggering 161%. In response, the government has halved the value of the country’s currency, suspended public works, and cut gas and electricity subsidies, among a number of drastic measures.

For twenty-two consecutive months, the unemployment rate in the United States fell below 4%, the longest streak since the 27 months from November 1967 to January 1970. The labor market held up even as the Federal Reserve tried to slow the economy to fight inflation.

About 67% of Americans disapprove of President Joe Biden’s handling of the economy in an October poll conducted by the Associated Press-NORC Public Affairs Research Center. Such sentiment, if it persists, could hinder Biden in his expected rematch with former President Donald Trump.

According to the World Bank, investment in China’s real estate sector fell by 9.4% from January to October. Weaknesses in the real estate sector and global demand for China’s exports, as well as high debt levels and shaky consumer confidence, are weighing on the country’s economy.

In the third quarter, the German economy shrank by 0.1%. According to the Bundesbank, Europe’s largest economy is expected to contract slightly again in the final quarter.

World trade is expected to grow by 1.1% in 2023, down from 5.2% in 2022, and ranks as the sixth lowest in the Organization for Economic Cooperation and Development (OECD) reports since 1980.

The decline reflects the slowdown in the global economy, rising protectionism, and geopolitical tensions between the United States and China.

Stock market rally at the end of the year

The S&P 500 ended 2023 up more than 24%, and the Dow finished at a near-record high as lower inflation, a robust economy, and prospects for lower interest rates supported investors, especially in the last two months of the year.

The Nasdaq gained over 43%, its best performance since 2020.

For most of the year, the growth in the broader market was driven mainly by seven stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla.

According to S&P Dow Jones Indices, these stocks, dubbed the “Magnificent 7,” accounted for about two-thirds of the S&P 500’s growth in 2023. Nvidia leads the group with an increase of about 239%, thanks to the mania around artificial intelligence.

Market strategists who track historical trends say that such strong annual performance by stocks often carries over into the next year, a phenomenon they attribute to factors such as momentum and strong fundamentals.

Investors in the U.S. entered 2023 bruised by sharp losses in both stocks and bonds in 2022. They expected inflation to decline further as the Fed raised interest rates. The trade-off would be a weaker economy and possibly a recession. But while inflation has fallen to around 3%, the economy has begun to grow thanks to strong consumer spending and a healthy labor market.

The stock market is now betting that the Fed will be able to achieve a “soft landing” where the economy slows down enough to dampen high inflation, but not so much that it falls into recession. As a result, investors now expect the Fed to start cutting rates as early as March.

In 2024, the Fed cut its benchmark interest rate by a quarter point three times. The rate is now between 5.25% and 5.50%, the highest level in two decades. The Fed raised rates 11 times between March 2022 and July of this year before pausing.

The European Central Bank’s (ECB) benchmark interest rate is 4%. Like the Fed, the ECB left rates unchanged at its last meeting. Unlike the Fed, the ECB did not signal the possibility of lowering rates next year.

But while the Fed is expected to cut its key policy rate to around 3.75% by the end of 2024, it will only fall to 3% by the end of 2026, and then rise again to around 3.5%, according to money market estimates.

This is in stark contrast to the rates that remained near zero for most of the decade following the global financial crisis, only gradually rising to 2.25%-2.50% in 2018.

By the end of 2026, ECB rates are expected to be around 2%, which is a decline but hardly a sign of a return to the unorthodox experiment with negative rates seen from 2014 to 2022.

Lower rates could boost broader market momentum in 2024. Wall Street is forecasting stronger growth in corporate earnings next year after a largely disappointing 2023, when companies struggled with higher labor and labor costs and shifting consumer spending.

Bond market investors seemed intent on losing for the third year in a row until the situation changed in late October. Concerns about possible interest rate cuts sent bond prices soaring and yields falling. The yield on 10-year Treasury bonds, which reached 5% in October, was 3.88% last Friday, down from 3.85% on Thursday.

The two-year Treasury yield, which is more closely aligned with the Fed’s expectations, fell to 4.25% from 4.28%. In October, it also exceeded 5%.

Many global markets also saw strong growth in 2023. The indices in France and Germany showed double-digit growth, while those in the UK rose by just under 4%.

Tokyo’s Nikkei 225 index was up 27%, its best year in a decade, as the Japanese central bank slowly ended its long-running ultra-loose monetary policy after inflation finally exceeded its target of about 2%. In July, the index rose to 33,753.33, the highest level since 1990.

The Shanghai Composite index lost about 3%, and the Hang Seng index in Hong Kong fell by almost 14%.

In December, bitcoin topped $43,000 after starting the year below $16,300. It and other cryptocurrencies fell in 2022 as rising rates hit investments considered particularly risky.

Oil falls, gold peaks

The price of crude oil fell by more than 10% in 2023 despite some experts’ predictions that it could exceed $100 per barrel.

Despite OPEC’s production cuts, a war involving energy exporter Russia and others in the Middle East, the US benchmark oil price fell by almost 11% in 2023 and by a whopping 21% in the last three months of the year.

Increased production in the United States, which is now the world’s largest oil producer, as well as in Canada, Brazil, and Guyana, has offset the decline in OPEC production. Not all OPEC members participated in the cuts, and some countries, such as Iran and Venezuela, are pumping more oil, energy analysts say.

Gold investors expect record high prices in 2024, when fundamentals of a sharp turn in US interest rates, ongoing geopolitical risk and central bank buying are expected to support the market.

Spot gold rose 13% in 2023, its best year since 2020, trading comfortably above $2,000 an ounce.

On December 4, the price of gold hit a record high of $2135.40 on US monetary policy easing in early 2024 following Fed Chairman Jerome Powell’s perception, surpassing the previous record set in 2020.

In May of this year, the precious metal almost became uncharted territory when the regional banking crisis began in the United States. By October, the price had dropped to almost $1,800 per ounce, until safe-haven demand caused by the Israeli-Palestinian conflict spurred another rise.

JPMorgan sees a “breakout rally” for gold in mid-2024, with a target peak of $2,300 on expected rate cuts. UBS predicts a record $2150 by the end of 2024 if the cuts materialize.

In its forecast for 2024, the World Gold Council predicted that a drop in long-term bond yields of about 40-50 basis points after a 75-100 basis point rate cut could lead to a 4% rise in gold.

Optimism about the IPO

The signs of life shown by the IPO market, especially in the second half of 2023, give analysts hope that more companies will be tempted to go public in 2024.

In total, according to Renaissance Capital, 108 initial public offerings raised about $19.4 billion in 2023. That’s up from an abysmal 71 IPOs in 2022, which raised $7.7 billion when high inflation and rising interest rates discouraged companies from going public.

This year’s big IPOs included healthcare products company Kenvue in May, British chipmaker Arm Holdings in September, and footwear company Birkenstock in October. According to Renaissance Capital, they accounted for more than half of the total IPO proceeds. Instacart also held a high-profile IPO in late summer.

The post-pandemic surge in IPOs was dampened by the highest inflation in four decades in 2022, raising concerns that the economy would weaken under the pressure. The Fed’s rate hikes to tame inflation have made borrowing more expensive and increased caution in the IPO market.

The Fed’s recommended measure of inflation, the monthly report on personal consumption and spending, has fallen to 2.6% from a high of 7.1% in mid-2022.

Cooling inflation and falling interest rates may push the IPO market to a more normal level of activity, which averaged about 170 IPOs with an average revenue of about USD 43 billion from 2017 to 2019.

“While the IPO market recovery is still somewhat fragile, all signs point to strong growth in 2024,” Renaissance Capital noted in its latest IPO review for 2023.

The IPO market is expected to grow along with the economy. Companies’ profits are expected to grow after overcoming the decline in revenues. Analysts predict that a profit increase of slightly less than 2% in the fourth quarter of 2023 may be followed by an increase of more than 8% in the first quarter of 2024 and 10% in the second quarter of 2024.

According to Goldman Sachs’ analysis, IPO activity may accelerate as CEOs gain more confidence that a soft landing will occur.