By Kelvin Lee, Alonso Munoz
2023 was the year of Taylor Swift! We have it under good authority that Taylor Swift helped boost US GDP this year… but on to a more serious note:
From global bank failures to the AI revolution, 2023 was action packed. For investors, there were big opportunities for those willing to look beyond the headlines. Yet again, in the spirit of American capitalism, it was a year of remarkable innovation and progress.
In our second edition of “a year in review”, we broke this year down month by month to highlight notable events, many of which will have lasting impacts on global economies, politics, and the future.
January – Volatile Start. As holiday vacations come to an end, investors are faced with rising rates and a highly volatile market. The trends in generative AI and weight loss GLP-1 drugs are now the biggest tailwind for equities while bonds underperform from higher for longer rate narratives. Analysts expect a recession in the 1st quarter. “Cash is King” becomes the strategy as managers use short term treasuries for dry powder. The U.S. hits its debt ceiling and the government has to resort to extraordinary measures until an extension.
February – No More Lending. M&A activity posts some of its worst months as higher borrowing costs eat away at leveraged buyouts. SPACs and IPO’s fall 70% year over year, and private credit firms step in to take advantage of the funding gap. Google also announces its natural language processing competitor Bard while Microsoft fully integrates Chat GPT4 into Bing.
March – Financial Turmoil. The surge in interest rates triggers substantial paper losses on bonds, raising concerns among depositors about potential liquidity issues within banks. In a domino effect, both Silicon Valley and Signature Bank collapse within a matter of days, prompting major U.S. banks to mobilize $30 billion to stabilize smaller regional financial institutions. To counteract the growing financial instability, the Federal Reserve implements the Bank Term Funding Program. In Europe, Credit Suisse collapses and is acquired by UBS. Meanwhile, Blackstone faces a setback as it defaults on a Commercial Mortgage-Backed bond and gates redemption restrictions on its flagship fund, BREIT.
April – Mixed Data? Quarter 1 GDP slows to 1.1%, while CPI moves up to 5% with housing and services spending continuing to be sticky. The GDP data showed services spending rose at a 2.3% annualized rate as unemployment falls to 3.4% and average wage growth increases. The consensus q1 slowdown is pushed back again to the second half of 2023 as the Fed’s “Goldilocks” economy starts to appear. Tax payments come due, giving the U.S. government until June to raise the debt limit. Trump pleads not guilty to 34 felony counts, Elon Musk launches its first test flight for SpaceX’s starship rocket, and John Rahm wins the Masters.
May – Debt Ceiling. Patrick McHenry introduces the Fiscal Responsibility Act of 2023 which includes provisions negotiated between McCarthy and President Biden to avoid a shutdown. The bill passes and suspends the debt ceiling until January 2025. While the bill includes caps on discretionary spending, its passage weeks before payment default and allowance for debt issuance is noted as a threat by credit agencies. The Treasury department will now have to expand issuance by billions of dollars, once again increasing the U.S. deficit.
June – Ukraine Revolt. In a surprise move, Wagner group owner Yevgeny Prigozhin defies Putin in the war against Ukraine. Prigozhin’s mercenaries march from southern Russia to Moscow, but Prigozhin calls off the full-scale rebellion after brokering a deal with Belarusian president Alexander Lukashenko. In an “unrelated accident”, a plane carrying Prigozhin and Wagner commander Dmitry Utkin crashed in Northern Moscow from a grenade related incident. ETF issuance climbs to all time highs, providing exposures to active thematic and treasury bills.
July – Last Rate Hike. The Federal Reserve raised rates by 25 bps for the last time this year, to a target range of 5.25% – 5.50%. The FOMC’s long hiking cycle has finally reached restrictive territory with inflation falling to 3.2% and unemployment rising to 3.5%. On equities, investor sentiment on AI, semiconductors and technology drives the magnificent seven to year-to-date highs. As a result, the S&P500 climbs past 4800. In the media, the Barbie and Oppenheimer movies came out, leading to $2 Billion in sales and renewed attention to services spending.
August – U.S. Gets Downgraded. Fitch Ratings cut the US’s credit grade rating from AAA to AA+. This downgrade comes from anticipated fiscal challenges over the next three years, coupled with a significant and increasing burden of general government. The decline in government confidence has been brought from repeated standoffs over debt limits and last-minute resolutions. Overall, the first half of the year was highlighted by a resilient economy. U.S. GDP grew by 2.4% in the second quarter, giving credit to the Fed’s goal of a softer landing. Huawei also quietly announces a new Mate 60 Pro phone, showing that China can build 7nm chips.
September – Strikes! After enduring a decade of challenging negotiations and stagnant wages failing to keep up with inflation, both the auto and entertainment industries have plunged into labor disputes. The United Auto Workers (UAW) and Hollywood’s Actors and Writers guilds have not only led strikes in their sectors but have also ignited protests by healthcare and transportation workers. The UAW’s new approach of pitting manufacturers against each other marks a turning point for long exploited workers. In other news, federal student loan payments resume following the Supreme Court’s June decision.
October – Hectic Macro. To start the month off, U.S. House Speaker Kevin McCarthy becomes the first speaker ousted in history from a vote led by Matt Gaetz. In the following week, Palestinian militant group Hamas attacks Israeli targets near the Gaza strip, launching a new global conflict in addition to the Ukraine Russian conflict in Europe. Outrage across the U.S. rises against pro-Palestinian movements across ivy league universities while Israel launches a counter assault on the Gaza Strip. Following the September strike for blue collar workers, UAW reached negotiations with most major domestic auto manufactures. Mortgage rates topple 8% and unemployment nearly breaks the 4% mark.
November – Record Spending and Credit. Surprise, surprise, Americans love to spend. Black Friday and Cyber Monday saw record sales numbers while increased buy now pay later services and credit card usage underscored the narrative of a weaker U.S. consumer. U.S. retailers and European luxury good providers also forecast slowing end of year revenues as consumers exhaust cash reserves. Chinese President Xi Jinping visits San Francisco, Open AI’s board gets ousted after firing then hiring their CEO Sam Altman, and Binance CEO CZ pleads guilty to money laundering charges.
December – Yields Tumble, Crypto Rises. Jerome Powell notes that rates are “sufficiently restrictive” for the first time, sending yields tumbling down to August levels. Unemployment shocks investors with a 3.7% print while inflation comes down to 3.1%. The Federal Reserve pivots its tightening cycle policy in its December meeting, forecasting 75bps of rate cuts by end of 2024. As a result, yields fall back to June levels. In crypto, Bitcoin climbs past $40,000 on optimism for ETF approval.
It’s going to be a great 2024. Happy New Year!
To contact the author of this story:
Kelvin Lee at kelvin@hamiltoncapllc.com
To contact the editor responsible for this story:
Alonso Munoz at alonso@hamiltoncapllc.com
