2023 by the numbers

2023 has been a rollercoaster ride for the global economy. From soaring inflation to historic tech layoffs, we've witnessed events that shook markets and redefined our financial landscape. As the year started, forecasts suggested a slight recession in the U.S., a more severe one in Europe, and a strong recovery in China. Yet, the outcomes were different: the U.S. avoided a recession, Europe coped better than expected, and China faced challenges in its recovery efforts. So, grab your coffee or popcorn and let's dive into some of the top news of the year and their lasting impact.

To inflationary inferno and back

2023 started where it ended... with inflation at an alarming 40-year high (for most countries worldwide). The causes differed from country to country, however this surge was was mostly driven by the combination of supply chain disruptions, the war in Ukraine, and strong consumer demand. This sent shockwaves through the financial system, eroding purchasing power and prompting central banks to aggressively raise interest rates. The good news is that global headline inflation has more than halved, from its peak of 11.6 percent in the second quarter of 2022 and the downward trend has been continuing throughout 2023. Inflation in the Euro Area reached 2.4% YoY in November 2023, while US CPI 3.1%.

Impact: While the recent months have shown signs of inflation easing, its impact is still felt on household budgets, businesses, and the overall economic outlook. Investors holding bonds got a lot of their value simply vanished. Good job for the ones that managed to purchase inflation-hedged bonds.

If you want to refresh the concepts around inflation, you can read my article.

Central Banks aggressively hike interest rates

Central banks worldwide, including the Federal Reserve and the European Central Bank, responded to the surge in inflation by aggressively raising interest rates. This move aimed to cool the economy and bring inflation back down to target levels (of 2%).

Impact: higher interest rates make borrowing more expensive, which can dampen economic growth and consumer spending. If you have a mortgage or a loan, you have definitely felt the pain, with consumer interest rates increasing dramatically over the year. This impacted the movements on the housing markets, with people choosing to rent over buying as they couldn't afford to pay the mortgage.

Tech Tumble

The once-unshakeable tech sector took a hard hit in 2023, experiencing massive layoffs and market downturns. Companies like Amazon, Google, and Meta shed thousands of employees, highlighting a shift in investor sentiment towards profitability over growth. Layoffs are not a new thing, but 2023 saw many companies dancing in synchro. The economy slowdown might have been the trigger in some cases, however in others it was simply a chance to refocus resources on other projects or decrease costs after the massive hirings happened post COVID-19 pandemic.

Impact: This shake-up has rattled the job market and forced tech giants to re-evaluate their strategies. Controversially, the NASDAQ 100 (that tracks the performance of the 100 largest non-financial companies listed on the Nasdaq stock exchange, and it's heavy on Tech companies) did perform very well though.

Markets normally reach well when revenue are going up (or are stable) but some sort of cost cuts is performed. Can you guess what is the highest cost of any company? People!

Geopolitical tensions and supply chain disruptions persist

Geopolitical tensions, particularly the ongoing war in Ukraine, continued to cast a shadow over the global economy in 2023. These tensions contributed to higher energy prices and disrupted supply chains, further exacerbating inflationary pressures. Increasing freight prices, port congestions and the draught of the Panama canal, made access or deliver goods even harder.

Impact: Geopolitical risks can increase volatility in financial markets and make it more difficult to predict investment outcomes. Also, many investors like to buy gold, USD and Swiss Francs whenever there are tensions or conflicts. This drives their prices up; with some good timing (not easy...) you could profit from it.

The Chinese real estate bubble

The Chinese property sector experienced a severe crisis in 2023. This sector, significant for household savings and confidence, accounted for about a quarter of China's domestic output and nearly 80% of household wealth, with a valuation of around $52 trillion in 2019 (or twice the US real estate market).

The rapid growth in property privatization, started in the 1990s, led to unaffordable housing prices, widening the wealth gap and triggering regulatory tightening in late 2020. Major developers like China Evergrande Group and Sunac China Holdings Ltd. faced defaults, shaking the confidence of global bondholders and collapsing the $200 billion high-yield real estate bond market.

In response, the Chinese government accelerated policy stimulus amidst a deepening debt crisis, but these measures struggled to generate new demand. Property sales and investment continued to decline. The crisis has significantly eroded family wealth, where a 5% decline in home prices could erase 19 trillion yuan ($2.7 trillion) in housing wealth. Bloomberg Economics predicts the housing sector's contribution to GDP will shrink from 20% to about 16% by 2026.

The crisis's roots lie in a speculative bubble where buyers invested in homes that were merely blueprints, and developers used these funds to finance new projects. This led to an oversupply, with an estimated twenty million unfinished apartments and billions of square feet of unsold housing. The cost to complete these projects is estimated at over five hundred billion dollars.

The Chinese government has pledged 550 billion yuan (seventy-seven billion dollars) to help finish housing projects, but this is seen as just a fraction of the total required funding, with much of this money yet to be utilized.

Impact: for the average investor, this crisis represents a significant shake-up in a previously lucrative and stable market. Investors who have heavily relied on real estate for asset growth are facing substantial losses. The collapse of the real estate bond market also indicates higher risk for those invested in high-yield debt securities. The broader economic implications, including reduced GDP contribution and ongoing property sales declines, suggest a cautious approach for investors looking towards the Chinese market.

Cryptocurrencies roar back

After a wild 2022 where Bitcoin lost more than 60% of its value, 2023 marked a push back, with Bitcoin (BTC) slowing getting back up, and passing the $40k mark. Other cryptocurrencies also managed to recover, with the global crypto market cap going from a low of $830B of Jan 2023 (from a peak of $3T in Nov 2021) back to $1.7T in Dec 2023. Although FTX, a crypto exchange, filed for bankruptcy in Nov 2022, the story behind one of America's biggest frauds unraveled in 2023.

Impact: the debate behind if cryptocurrencies should really be added to the average portfolio is still ongoing, with opposite views from big personalities on both sides. One thing is for sure, their extreme volatility can offer an opportunity if have the stomach for the potential swings downwards. If you were to invest at the beginning of this year in Bitcoin for example, your value would have now 3 times your initial investment.

The stock market made many investors happy

Cryptos were not the only thing to roar back. After the annus horribilis that 2022 was, in 2023 the stock market gave a fantastic returns. If we take the S&P500 as example, in 2022 it returned -18% but at the time of writing, it is +23.5%!

Impact: it is important to maintain a long-term investment horizon and avoid making impulsive decisions. Timing the market is close to impossible, therefore stick to your strategy, no matter the daily (or yearly) fluctuations. Every investor will go through a couple bear markets - and that's ok.

The yield curve inverts

There have been chats about recessions worldwide throughout the year. This definitely happen, as many countries had a slowdown in GDP growth, with powerhouse countries like Germany entering into mild recession. One of the key indicators used by economists to predict recessions is the yield curve. The yield curve is a graph that plots the interest rates of bonds with equal credit quality but differing maturity dates (typically of government bonds ranging from short-term to long-term). A normal yield curve slopes upward, reflecting higher yields for longer-term bonds. An inverted yield curve, where short-term rates are higher than long-term, can indicate economic downturns.

On 5th July, 2022, the yield curve between the two-year and ten-year Treasury notes inverted, and it’s stayed that way since then.

Impact: investors relying on fixed-income investments (e.g. bonds), lower long-term yields could reduce the expected income. Also, if a recession does happen, the implications are multiple: potential job losses, declined spend by companies but also shift in customers spend. One way to protect yourself from a recession is to invest in specific asset classes that are more resilient against a recession: defensive stocks which are from sectors like healthcare or utilities.

Taylor Swift’s US economic impact was larger than 35 countries' GDP

The success of the Eras tour—a Super Bowl-sized event spanning numerous cities that has shattered records, sparked ticket frenzies and even caused the equivalent of a small earthquake—has propelled the pop star’s net worth past $1 billion, according to a Bloomberg News analysis. The singer’s 53 US concerts this year added $4.3 billion to the country’s gross domestic product, according to estimates from Bloomberg Economics. Cities hosting her concerts have seen economic impacts, with fans spending thousands on tickets, lodging, outfits, and merchandise. 

Impact: to the average investor, probably not much. To all the companies involved in the tour and producing merchandising: big increase in profit. To Taylor's bank account: happy days.

Another bank bites the dust

US banks that failed in 2023: Signature Bank ($110 billion), Silicon Valley Bank (SVB: $209 billion), and First Republic Bank ($229 billion). This totals $548 billion.

Impact: the timely actions by the US Treasury and the Federal Deposit Insurance Company halted the contagion in the United States. Except for Credit Suisse, which was absorbed by UBS with the support of the Swiss authorities as it was perceived as "too big to fail".

Saudi pro league means game

Saudi Pro League clubs’ summer 2023 spending of $957 million was second only to the United Kingdom’s Premier League ($1.39 billion), beating out spending numbers of the other four big European football leagues (in Italy, France, Spain, and Germany). Some of the world's top talents such as Cristiano Ronaldo, Neymar, and Karim Benzema were poached as part of the spend.

Impact: with Saudi Vision 2030, the kingdom is looking to diversify its economy away from oil, while making sports a noteworthy contributor to its GDP. This will inject fresh capital in different areas, and might proper growth in exiting sectors - such as the Saudi football/soccer pro league.

Conclusions

2023 has been overall a good year for the stock market, even though at macro level the economy did get hit by multiple factors. With expectations that in 2024 central banks will cut interest rates, we have an even better year for investors ahead. Buckle up and see you on the other side!