Quarterly Commentary 4Q’23
A Strong Finish to an Unexpected Year
Markets capped off a strong 2023 with a surprisingly buoyant 4th quarter. The S&P 500 was up 11.7% for the quarter and 26.3% for the year, while the global MSCI ACWI returned 11.2% for the quarter and 22.8% for the year. [See footnote 1] Big tech stocks continued the AI-fueled uptrend they’d been enjoying all year and in the 4th quarter that optimism was finally shared more broadly. Smaller capitalization stocks in particular rallied on the easing rate environment. Bonds were up as well with interest rates beginning to ease, pushing the Bloomberg Barclays Aggregate Bond Index into positive territory for the quarter (+6.4%) and the year (+5.5%).
As a whole, 2023 defied economic expectations. The year brought all sorts of challenges: continuing inflation and (until recently) rising interest rates, the shock of multiple bank failures earlier in the year, new and ongoing supply chain uncertainties, labor shortages and unrest, ongoing and expanding wars in Ukraine and the Middle East, the upcoming high-stakes presidential election in the U.S., a struggling China and soaring global temperatures. At the beginning of the year, most major economists were calling for an almost-certain global recession that never arrived. Instead, after 11 consecutive rate hikes from near 0% to 5.25%, the US economy is standing strong and global growth remains positive as well. U.S. inflation is now moderating to the 3-3.5% range, yet the jobs picture remains strong. The Federal Reserve has indicated that the July 2023 hike was likely its last in this inflation-fighting cycle.
Experts were also wrong on rising temperatures, which soared well beyond what climate scientists had been projecting. The temperature anomalies were astonishing: 2023 was the hottest year on record for the planet, July 2023 was the hottest month and July 6 the hottest day ever observed in recorded history. [See footnote 2] The cost of damages from climate calamities – floods, fires, drought – also soared, to nearly $100 billion in the US alone. [See footnote 3]
In the face of rising temperatures, the world continues to add more renewable energy capacity and 2023 was no exception; renewable sources like solar and wind now provide 30% of the world’s electricity generation. But 2023 also saw a rise in fossil fuel production, while renewables were under pressure from multiple forces: rising interest rates, negative politics, and bureaucratic delays in implementation of the US Inflation Reduction Act (IRA) and other climate- friendly policies. Some large-scale wind and solar projects were scuttled due to being seen as unaffordable in the higher interest rate environment. Overall, 2023 turned out to be a terrible year for renewable energy stocks as the impact of rising interest rates outweighed the promise of the IRA and other recent legislation.
The 4th quarter delivered better news and some positive convergence between the climate and markets. Bullish statements from the Fed, moderating interest rates, and December’s COP28 Climate Summit combined to provide a boost to the clean tech sector. While not delivering everything climate advocates want, COP 28’s final agreement included significant achievements including: 1) an agreement to triple the world’s renewable energy capacity to 11,000 GW by 2030, 2) a commitment of $700 million from developed countries to (finally) operationalize the Loss and Damage Fund which will help the most vulnerable countries manage climate impacts, and 3) a first-time commitment to transition away from fossil fuels – an especially remarkable final agreement from a climate summit hosted by petrostate United Arab Emirates. Those two things together – moderating rates and the announcements from COP28 – brought some end-of-year relief for investors focused on a sustainable and just energy transition.
Looking to 2024
We’re expecting more positive momentum for renewable energy investments as we move into 2024, and as those global commitments towards renewables and away from fossil fuels come to life. It’s also notable that the IRA has so far distributed only a fraction of its projected funding. We expect to see a lot more capital put to work in 2024, especially in new US-produced solar capacity, advancement in battery technologies, and the community-focused Greenhouse Gas Reduction fund, which will catalyze many of the justice provisions of the IRA. The fossil fuel industry will likely fight every step of the way and there are likely to be as yet unforeseen bumps in the transition to a lower carbon economy. Regardless, we’re optimistic that – for better or worse – the engines of capitalism will help do what they do so well: push new – and in this case, cleaner – technologies to market with speed and at scale. Across our portfolios, we continue to invest in a diversified set of securities poised to both contribute to and benefit from this energy transition.
It should also help that the overall economic backdrop is much healthier than it was at the start of 2023. The global economy has endured a dramatic rise in interest rates over the past two years and emerged with a stable growth outlook and a strong jobs for regions around the world. Should conditions slow from here – as it is still possible they may do – the Federal Reserve and other central banks now have the powerful tool of monetary policy (e.g. lowering rates) available to help spur growth. In the stock market, we expect the more stable interest rate environment to contribute to broadening market participation, so that stocks beyond the largest “Magnificent 7” also thrive. We remain especially bullish long-term investors in the energy transition. We’ll reiterate our view that renewable energy and other clean technology companies will be propelled by fresh capital, new global commitments, and very possibly a much friendlier rate environment in 2024 and beyond.
1 Source for Stock Index Returns: Refinitiv Datastream2 https://www.bloomberg.com/news/features/2024-01-08/2024-could-be-even-warmer-than-record-setting- 2023?cmpid=BBD010824_GREENDAILY&utm_medium=email&utm_source=newsletter&utm_term=240108&utm_campaign=greendaily3 https://www.bloomberg.com/news/articles/2024-01-09/us-suffered-record-number-of-billion-dollar-disasters-in- 2023?cmpid=BBD011024_MKT&utm_medium=email&utm_source=newsletter&utm_term=240110&utm_campaign=markets You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.