Global financial markets confounded gloomy expectations in 2023. Stocks rallied, and bonds reversed heavy losses made early in the year as recession fears were replaced by growing confidence that US policymakers would achieve an economic soft landing. Many major share indices recorded double-digit gains during the year, helped by a strong rally in November and December as falling inflation made traders more hopeful of an interest rate cut in 2024. Britain’s FTSE 100 lagged behind the global rally, though, gaining less than 4% in 2023. At the start of the year, many investors were expecting corporate earnings to decline as the US economy was dragged into recession by high borrowing costs. But it avoided a downturn, despite US interest rates rising to a 22-year high. Growth has beaten forecasts, while US corporate profits hit a near record in July-September. While geopolitics cast a shadow over the markets, firms linked to artificial intelligence soared as investors backed the potential of the technology. Relief at the US’s strong growth in 2023 helped counter concerns over China’s recovery, and the slow pace of the European economy, which ended the year teetering near recession. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says 2023 has not played out as expected at all. “We were expecting the US to enter recession, but the US [recorded] about 5% growth in the third quarter,” she says. “We were expecting the Chinese post-Covid reopening to boost its growth and fuel global inflation, but a year after its zero-Covid measures ended, China is suffocating due to unexpected deflation and a worsening property crisis. “We were expecting last year’s negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None of that happened.” Global shares The MSCI World Index, which tracks shares in 47 countries, had a rollicking year, rising more than 20% since the start of January. Trading was volatile, though – with share prices going up through the first half of 2023, before sliding from August until October. But then an “everything rally” began in November, as falling inflation spurred hopes of interest rate cuts on both side of the Atlantic. Then, in December, stocks surged after America’s top central banker, Jerome Powell, fanned hopes that borrowing costs had peaked. America’s S&P 500 index, a broad gauge of US stocks, gained 25% over 2023, notching up a record high. The tech-focused Nasdaq Composite jumped by about 45%, led by the “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. And the Nasdaq 100 index of large tech stocks had its best year since the dotcom bubble burst, rising by more than 50% to end 2023 at a record high, driven mainly by mega tech stocks. America’s stock market rally was impressive, but lopsided. About 70% of S&P 500 stocks underperformed the index during the year, with roughly a third falling in 2023. European markets also racked up solid gains as they bounced back from a torrid 2022. Germany’s Dax climbed by 20%, despite a lacklustre year for Europe’s largest economy, and Italy’s FTSE MIB rallied by almost 30% Optimism about aggressive interest rate cuts in 2024 drove Asia-Pacific stocks to a five-month high at the end of 2023, while India’s major indices gained about 20% to hit record levels. This market rally meant that only 11 of the world’s richest 50 people became poorer in 2023, according to Bloomberg’s daily updated list of billionaires. FTSE 100 Britain’s blue chip share index lagged behind its rivals in 2023, gained only about 4%. The FTSE 100 index had a bright start, breaking through the 8,000-point mark for the first time to set a new all-time high of 8,047 on 16 February. But the rally lacked legs, and in March the index suffered its two biggest falls of the year as fears of a banking crisis hit. Its third-worst day came in early July, when it lost 2.2% as investors braced for central banks to use interest rates to combat high inflation. With the Bank of England raising the base rate five times during 2023, from 3.5% to 5.25%, UK stocks remained jittery, and the FTSE 100 closed the year at 7,733 points. The FTSE 250 index of smaller companies rose by about 4.5% over the year, picking up gains towards the end of 2023 as traders bet that UK interest rates had peaked. Within the FTSE 100, there were some impressive performances. Rolls-Royce gained 220% as new chief executive Tufan Erginbilgiç pressed on with a turnaround plan for the aerospace company. Shares in Marks & Spencer, another famous UK name, rose by 120% – as a clothing turnaround helped its value swell enough to return it to the blue chip index in September. Notable movers in 2023 Nvidia was the poster child of AI investing: its share price more than tripled in 2023. The chip maker reported swelling revenues and profits as demand for the high-powered processors needed to train the latest AI models grew even faster than Wall Street expected. But even Nvidia’s 240% surge in 2023 wasn’t enough to keep pace with Symbotic, which has developed an AI-powered robotic technology platform for warehouses which it says can move goods faster and more efficiently. Symbotic shares climbed by about 350% during the year, as it reported higher revenues and smaller losses. In healthcare, weight-loss drugs captured most market attention. Denmark’s Novo Nordisk became Europe’s most valuable company thanks to its obesity drug Wegovy, which helps patients lose weight and also reduces the risk of stroke. Other pharma companies tried to compete, but in December Pfizer scrapped the twice-daily version of its experimental weight loss pill after finding it caused a high rate of side effects, knocking its share price. Weight loss drugs dominated earnings calls last autumn, with companies across the economy pressed on whether the boom in anti-obesity products would help or hinder their sales. Banking blues The past 12 months have been a mixed time for banks. Although many reported bumper profits, rising interest rates left them nursing losses on their government bonds. Some didn’t survive the year. In early March, US crypto-focused lender Silvergate failed, closely followed by Silicon Valley Bank. The latter was the largest US bank failure since the 2008 financial crisis, and followed a bank run whose speed surprised regulators. Days later, fears over the health of Credit Suisse rattled the markets, wiping more than £75bn off the FTSE 100 in a day as the Swiss bank lurched towards rescue by UBS. In the UK, NatWest, dogged by its debanking row with Nigel Farage, fell by almost 18% in 2023 while Barclays lost 3%. The whole UK banking sector came under pressure this year over its net interest margins – the lucrative gap between saving and borrowing rates – with the Treasury committee pushing for better treatment of savers. Michael Hewson, market analyst at CMC Markets, says that even though expectations had been low, the UK banking sector had “a disappointing year”.“We already knew heading into the year rising interest rates are good for bank margins, however the flip side of the coin was that firstly demand for loans and mortgages was likely to slow, and then on top of that competition for savings was also likely to act as a drag on margins.” “There was also the fact that banks were expected to come under political scrutiny when it comes to their savings rates at a time when consumers were starting to feel the pinch from the rising cost of living,” says Hewson. Bonds Bond traders endured a year to forget for most of 2023, before the biggest two-month rally on record in the debt market lifted their spirits. Through most of 2023, bond prices weakened amid concerns that major central banks would keep increasing interest rates in order to quell inflation. In October, US Treasury prices hit their lowest level since 2007, with yields (the interest rate on the bonds) rising over 5% for the first time in 16 years. UK government bonds hit their weakest point since 2008 in August. This left bond funds facing a third straight year of losses for the first time in about 40 years. But this all turned around in November, on growing optimism that inflation was cooling and interest rates would soon be lowered. Investors piled into treasury bonds, which drove up prices and helped trigger a powerful market rally. The Bloomberg Global Aggregate Total Return Index has risen by nearly 10% over November and December, its best two-month run in data going back to 1990. But Vincent Chaigneau, head of research at Generali Investments, warns that this wave of optimism could falter, if the US Federal Reserve starts tempering expectations of quick cuts, or if the US economy suddenly comes to a halt. “Last Christmas, everyone and their grandma feared a recession,” he said. “A year later, they’re all worshipping Goldilocks [a very soft landing if any, quick disinflation, large rate cuts]. Beware the pitfalls of the consensus.” The pound Sterling had its best year against the US dollar since 2017. Having begun the year at $1.21, the pound hit 15-month highs in July of more than $1.31 as investors bet that UK interest rates could rise as high as 6.5%. But sterling then fell back through the autumn, as UK inflation eased and the City began to conclude that monetary policy would not need to be quite so restrictive. With inflation now down to 3.9%, and UK interest rates probably at their peak at 5.25%, the pound ended the year at about $1.27. The other side of this was a generally weakening dollar, which also lost more than 3% against the euro, as investors anticipated rapid cuts in US interest rates in 2024. “After shedding all of this year’s gains during an autumn retreat, the US dollar, as benchmarked by the trade-weighted DXY basket, stands no higher now than it did in spring 2022,” says AJ Bell investment director Russ Mould. “Investors must now assess why the globe’s reserve currency is sliding, whether those trends will continue and what the potential implications would be for investment portfolios should the greenback continue to weaken.” Commodities Oil has had a volatile year, with prices both pushed down by fears of a global downturn and lifted by concerns that geopolitical tensions would hurt supply. And in the end, the price of crude ended the year down by about 10%, despite the Opec cartel’s best efforts to prop up prices by cutting production. Having started January at $86 a barrel, Brent crude finished the year about 10% lower, at $77.50. In the spring, the price of Brent crude started sliding towards $70 a barrel, which spurred Opec into trimming output in order to tighten the oil market. Those cuts drove the oil price towards $100 a barrel in September, but it never quite reached that milestone this year, and instead weakened in the final three months of 2023, before a pickup in December as attacks on vessels in the Red Sea prompted fears of disruption to shipping. Among other commodities, iron ore prices gained more than 50%, as China tried to prop up its troubled property sector. Cocoa prices rose by about 72% to their highest level in four decades as global shortages bit – and pushed up costs for chocolate makers. But other agricultural commodities have struggled. The price of wheat has fallen by more than 20% in 2023, corn is down more than 30% and soya beans have lost almost 14% this year, thanks to a loosening of supply bottlenecks and increased production. Gold Geopolitical tensions and easing inflation rates helped to push the gold price up by more than 10% in 2023, which was its best performance in three years. Having begun the year at $1,824 an ounce, gold ended 2023 on about $2,065. In the final week of 2023, London’s gold price benchmark hit an all-time high at a daily auction. Marios Hadjikyriacos, senior investment analyst at XM, says gold was boosted by the weaker dollar, and falling real yields on bonds, as well as purchases from some central banks, including China’s. Ruth Crowell, head of the London Bullion Market Association, says: “Gold continues to be the safe-haven of choice in periods of uncertainty and high volatility.” Bitcoin The world’s largest cryptocurrency jumped by 150% in 2023, despite starting the year overshadowed by the collapse of crypto exchange FTX in November 2022. It jumped from about $16,500 at the beginning of the year, to about $42,227 at the end of last week. Bitcoin’s rally was fuelled by ongoing speculation that America’s SEC would approve a bitcoin exchange-traded fund (EFT). This would be a milestone for investors, allowing large institutions to buy cryptocurrencies for the first time. Some experts believe approval for a bitcoin ETF could come as early as January, with more than a dozen firms reportedly waiting for news of the green light from the SEC.