As 2023 year progressed, inflation decelerated, prompting the Federal Reserve to hold rates steady. In tandem with these positive developments, tech stocks rebounded, and the broader economy grew—quashing fears of an impending recession. With this in mind, let’s quickly review a few of 2023’s most notable economic highlights and lowlights.
In 2023, the American economy demonstrated considerable resilience amidst significant turbulence.
The year began on a rough note. The S&P 500 opened the year on January 2nd a sizable 25% below its all-time high—putting the index deep into bear-market territory. Meanwhile, the tech-heavy NASDAQ started off the year 32% below its peak—as did many NASDAQ hopefuls, who collectively saw valuations crater and bankruptcies soar.
In March, the country’s financial sector experienced three of the four largest bank failures in history. And in early June, the Treasury narrowly escaped a debt default. Even so, Congress’ history of uncomfortably close calls caused Fitch to downgrade the federal government’s credit rating in August 2023—the second time in history this had ever occurred in the United States.
To curb persistent inflation, the Federal Reserve maintained its rate-hike spree, and jacked interest rates by a quarter-point each in February, March, May, and July. The housing market bore the brunt of monetary tightening as mortgage rates surged to their highest levels in 23 years, dampening activity in the real estate sector.
Despite these headwinds, the economy remained robust. The labor market, for instance, sharply defied expectations; in February 2023, the country achieved the lowest unemployment rate in over five decades.
As the year progressed, inflation decelerated, prompting the Federal Reserve to hold rates steady. In tandem with these positive developments, tech stocks rebounded, and the broader economy grew—quashing fears of an impending recession. With this in mind, let’s quickly review a few of 2023’s most notable economic highlights and lowlights.
GDP Rose Faster Than Expected
The U.S. economy outshined forecasters’ expectations with a series of growth spurts in 2023. After a modest 2% annualized expansion in the first quarter, slightly below the Q4 2022 pace of 2.6%, the economy gained momentum in the second quarter as growth notched 2.1%.
In Q3, Gross Domestic Product (GDP) grew at an annualized rate of 5.2%—the strongest showing since the fourth quarter of 2021. Robust spending across sectors—including both the public and real estate sectors—helped drive the Q3 boom. Specifically, business investment contributed 1.3% to GDP growth, while government spending added a hefty 5.5%.
Consumers, the bedrock of the economy, chipped in as well, boosting spending by a healthy 3.6 percentage points. While a slowdown is anticipated in the final quarter of 2023, the economy is mostly in the clear—and is on track toward a soft landing instead of a much-dreaded recession.
The Labor Market Remained Robust
The U.S. labor market started 2023 on a high note. In January 2023, the Bureau of Labor Statistics (BLS) recorded that employers added 517,000 jobs—nearly double December 2022’s gain of 260,000 positions.
However, signs of a cooldown were evident by mid-year, as June’s 209,000 job additions fell below the first-half average of 278,000. Nevertheless, job growth remained slow but steady in the latter half of the year, with the economy adding 150,000 and 199,000 new jobs in October and November, respectively.
Throughout the year, wage growth remained robust and outpaced inflation. Salaries and wages rose 4.6% between September 2022 and September 2023, which was 1.4 percentage points faster than the 3.2% increase in the Consumer Price Index for All Urban Consumers (CPI-U). Meanwhile, the annual increase in average hourly earnings remained above 4% throughout the year before slowing to 4% in November.
The national unemployment rate—which began the year at a 53-year low of 3.4%—increased to a one-year high of 3.9% in October before falling to 3.7% in November. The labor market’s surprising strength in the face of an elevated interest rate environment kept 2023 economic growth on track. And as unemployment shifts towards the long-term average, inflation may continue to fall.
Inflation Lost its Steam
After peaking at 9.1% in June 2022, inflation gradually loosened its grip on the economy. Encouragingly, the CPI rose by just 5% on an annualized basis at the end of the first quarter of 2023. By mid-year, inflation had hit a two-year low, increasing by 3% on a year-over-year basis in June before slightly ticking up to 3.7% in September. The CPI resumed its downward trend in the last quarter, ending at 3.1% in November.
Similar to headline inflation, core inflation—which excludes volatile food and energy prices—maintained a falling trajectory in 2023. It finished the first quarter at 5.6% and further eased to 4.8% by the end of the second quarter. In the second half of the year, core inflation continued its descent, reaching 4.1% in September before dropping to 4% in November.
The cooling of both headline and core inflation are signs of progress in the Federal Reserve’s fight against rising prices. Now, it appears that the nation’s central bank is taking its foot off the gas pedal. Having already paused rate hikes three times this year, the Fed may continue to soften its approach into 2024, barring significant near-term changes.
Mortgage Rates Kept Going Up
After peaking at 7.08% in November 2022, mortgage rates continued their volatile ride throughout 2023. The Fed’s rate hike in March pushed the average 30-year fixed rate from 6.48% in the first week of January to 6.73% on March 8th, 2023.
Rates then settled in the 6% range between April and July before (again) surpassing the 7% mark in August. Mortgage interest rates continued their upward ascent throughout Q3, and reached a 23-year high of 7.9% in the last week of October.
While the 30-year fixed-rate mortgage has since dipped to 6.67% as of the week ending December 20th, rates remain double what they were at the beginning of 2022.
Buyouts and M&A Activity Slowed
The Federal Reserve’s rate increases pushed the effective federal funds rate (EFFR) from near zero to a range of 5.25%–5.50% in 2023.
The increased cost of borrowing proved a key challenge to closing buyout deals—the majority of which rely on significant debt financing. As a result, leveraged buyout multiples declined, with the average purchase price multiples falling from a peak of 12.4x EBITDA in the first quarter to 9.3x by the third quarter of 2023.
Simultaneously, mergers and acquisitions (M&A) activity also experienced a downturn. 1,111 deals valued at $1.38 trillion were consummated in 2023, a marked drop from the 1,608 deals and $1.37 trillion in value transacted during 2022.
High Rates Froze The Housing Market
High mortgage rates wreaked havoc on the 2023 housing market. As rates continued their climb in 2023, existing home sales cratered to a 13-year low. Paradoxically, despite the slump in sales, home prices kept rising—a phenomenon that can be attributed to a severe lack of housing inventory. This unfortunate combination of high mortgage rates and surging prices sent the National Association of Realtors affordability index plummeting to a record low of 91.7 in August—the worst since 1989.
This decline in affordability similarly decimated mortgage demand. In early October, mortgage demand dropped to a 27-year low, with mortgage application volume down 22% year-over-year and refinances down 11% from a year ago.
The Magnificent Seven Led the Tech Stock Rally
Technology stocks shook off their 2022 blues with a remarkable comeback in 2023. This was thanks in part to the artificial intelligence boom, which helped propel some names to all-time highs amidst elevated interest rates. Leading the charge were the Magnificent Seven—Apple, Amazon, Microsoft, Alphabet, Tesla, Nvidia, and Meta—which together gained 75% in 2023.
Meanwhile, the technology stocks within the Nasdaq-100 reached a new high of 16,772.71 on December 19th, surpassing the previous record of 16,764 set on November 22, 2021. With a 53% year-to-date increase, the Nasdaq is on track for its best annual performance since 1999.
Likewise, the Dow Jones Industrial Average achieved a record high of 37,090.24 on December 13th, surpassing its prior high of 36,799.65 from January 2022. Over the last year, the Dow gained approximately 11%.
Startup Valuations Declined
2023 was a tough year for startups. As venture capital dealmaking activity slowed, startups struggled to raise funds—and over 500 startups declared bankruptcy or shuttered their doors.
Macroeconomic factors like inflation, rising interest rates, and the Silicon Valley Bank collapse played a major role in this squeeze. Notably, Carta’s third quarter 2023 Private Market report paints a stark picture of how startup valuations at every stage fared since the valuation bubble in 2021.
Unsurprisingly, most private companies fared poorly—though some felt more pain than others. Seed and Series A startups, for example, made it out relatively unscathed. While early-stage valuations dipped from their Q1 2022 highs, they managed to rebound somewhat. Seed stage pre-money valuations climbed back to $14.4 million in Q3 2023, trending up a sizable 43.2% from Q1 2021 levels. Series A startup valuations similarly declined from their Q1 2022 zenith of $48 million to $40 million in Q3 2023, but still trended 7.1% up from the first quarter of 2021.
However, the situation was more bleak for later-stage companies. Valuations for Series B, C, and D startups more than halved from the highs recorded in Q1 2022. By the third quarter of 2023, these valuations had further declined by 21%, 37.5%, and 49.1%, respectively, as measured from the peak in the first quarter of 2022.
It’s difficult to know what’s ahead. Whether it’s a 2021 bull market, a 2022 bull market, or a year of ups and downs like 2023, TSG remains committed to partnering with investors like yourself across all market conditions.
With decades of combined experience, our specialized wealth managers can help you draft a bespoke financial plan and formulate customized investment strategies that thrive amidst uncertainty.
