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Quarterly Performance Update

Global stocks and bonds rebounded in 2023’s final quarter, delivering solid three-month and year-to-date gains. Plunging bond yields, moderating inflation and changing central bank sentiment aided the backdrop.


Year-End Rally Amplified U.S. Stock Market’s 2023 Performance

Bolstered by moderating inflation, declining Treasury yields and a more-dovish outlook from the Federal Reserve (Fed), U.S. stocks rallied in the fourth quarter.

After lifting its short-term interest rate target to a 22-year high in July, the Fed held rates steady through year-end. By December, policymakers suggested their rate-hike campaign was over as they penciled in three rate cuts for 2024. This news helped calm investor fears about recession and fueled expectations for an economic soft landing.

Meanwhile, U.S. Treasury yields, which had soared to multiyear highs in October, staged a rapid and steep reversal in the year’s final two months. Plunging yields further supported optimism among stock investors.

For the quarter, the S&P 500® Index returned 11.69%, as all sectors other than energy advanced. For the full year, the index gained 26.29%, with the benchmark’s information technology sector soaring nearly 58%. Other notable year-to-date leaders included the communication services sector, up nearly 56%, and the consumer discretionary sector, up more than 42%.

Non-U.S. Stocks Ended Year on a Strong Note

Non-U.S. developed markets stocks (MSCI World Ex-USA Index) underperformed U.S. stocks, gaining 10.51% for the quarter and 17.94% for the year. Similar to the U.S., slowing inflation, falling government bond yields and central banks in pause mode aided market sentiment in the fourth quarter.

European stocks advanced and outperformed the broader world index despite lingering recession worries. The region’s manufacturing and services sectors improved modestly in the quarter but remained in contraction territory. Inflation moderated to its lowest point since July 2021 but remained higher than the central bank’s target.

U.K. stocks underperformed the broader market alongside weak economic data. While manufacturing continued to contract, the services sector climbed back into expansionary territory in the quarter. Inflation eased but remained well above the central bank target.

Elsewhere, emerging markets stocks (MSCI Emerging Markets Index) returned 7.86% for the quarter and 9.83% for the year. Weak performance in China largely accounted for the index’s lagging fourth-quarter results versus its developed markets peers.

Treasury Yields Plunged, and Bonds Bounced Back

Bonds struggled early in the quarter as Treasury yields soared to multiyear highs. The 10-year Treasury note briefly topped 5% for the first time since 2007. But yields staged a dramatic reversal in the quarter’s final two months amid slowing inflation and a stable federal funds rate target.

After hiking rates to a range of 5.25% to 5.5% in July, the Fed remained on hold at each of its remaining 2023 policy meetings. By the December meeting, the Fed confirmed investors’ rate-cut expectations, indicating they anticipate cutting rates three times in 2024.

Against this backdrop, the 10-year Treasury yield plunged from 4.58% on September 30 to 3.88% on December 30. The two-year Treasury yield fell from 5.05% to 4.25%. The yield curve steepened but remained inverted.

Meanwhile, annual headline inflation, which was 3.7% in August, moderated to 3.1% in November. Falling energy prices largely accounted for the slowdown. Core prices rose at an annualized rate of 4.0%, with shelter costs accounting for 70% of the gain.

With yields dropping, inflation slowing and the Fed pivoting, bond returns improved. The Bloomberg U.S. Aggregate Bond Index returned 6.82% for the quarter, pushing its year-to-date gain to 5.53%.

Elsewhere, government bond yields in the U.K. and Europe also declined as inflation eased and central banks paused. The U.S. dollar weakened, and Bloomberg’s dollar-hedged global bond index returned 5.99% for the quarter. Emerging markets bonds also rallied across the board.

Q4 2023 Performance Update

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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