Three Market Surprises of 2023 & What We’re Watching Entering 2024

Markets in 2023 kept investors on the edge of their seats. Groundbreaking technological advancements, mega-popstars being blamed for summertime inflation, and a December Fed pivot were just a few of the plot twists. We reflect on three macro developments that defied market expectations and share some of the questions that are top of mind as we turn our attention to 2024:

1. What US landing?

The widely debated “hard landing vs. soft landing” for the US economy turned out to be no landing – or maybe even a takeoff. US GDP growth sequentially accelerated all year and continually outpaced expectations. Upside revisions also diverging meaningfully from growth in Europe, which remained more tepid and in line with expectations. US consumers and corporates shrugged off higher policy rates and Uncle Sam chipped in with big fiscal incentives through the Inflation Reduction Act (IRA) and CHIPS Act. High real rates didn’t dampen real activity and final demand accelerated throughout the year despite manufacturing being in the doldrums.

US growth acceleration continued to surprise all year

2. What liquidity crunch?

In January 2023, the market expected US policy rates to end the year under 4.5%, as indicated by Fed Fund futures. Instead, the Federal Reserve went on to hike interest rates four more times before pausing at 5.25%. But that wasn’t the only monetary policy surprise. Despite continuing to hike, the Fed actually expanded liquidity in the spring and summer of 2023 on the back of concerns that that failure of Silicon Valley Bank would trigger a credit tightening. US liquidity was the outlier relative to other countries that deployed a broader range of monetary policy tightening tools, and this contributed to strong US equity returns.

US central bank reserves and currency in circulation expanded