It was a confusing year for the economy and the markets. At the start of 2023, economists were widely predicting a global recession and Wall Street was pessimistic on stocks, with many analysts expecting the S&P 500 to finish the year just a bit higher than where it started. Fast forward 12 months: no recession (yet) and the S&P 500 is incredibly close to an all-time high.
Here are 11 charts that help explain how we got here.
Inflation and its ripple effects
central banks around the world continued an aggressive campaign of interest rate hikes in 2023, by raising key rates in a bid to control the highest inflation in generations.
Inflation has slowed significantly in many places, although it remains above the Federal Reserve’s target (around 2%), and rate hikes have paused. The question is how long central bankers will need to keep rates high to ensure inflation is controlled without curbing economic growth.
These losses only become real if banks have to sell the assets. Before its implosion, SVB was forced to do just that, offloading its bonds at a deep discount to repay depositors. The losses raised alarms, prompting more customers to demand their money back – a classic bank run – and increased concerns about unrealized losses at other regional banks.
Rising interest rates also increased the cost of borrowing for consumers and businesses, which rippled throughout the economy, particularly in commercial real estate.
Upbeat economic indicators, gloomy sentiment on the economy
A wealth of U.S. macroeconomic data suggests reason for celebration: Unemployment has remained low and GDP has grown rapidly this year. In 2020, wage growth far outpaced inflation largely due to pandemic-related distortions. This trend returned this year, with wage growth above inflation for the first time since the post-coronavirus economic recovery began in the second half of 2020.
What explains the disconnection? Still high prices? Fears of recession? The “vibration”? Whatever the explanation, voters’ feelings about the economy — and President Biden’s handling of it — could be potentially decisive in the 2024 election.
A summer of strikes
The “Barbenheimer” weekend closely followed a strike of tens of thousands of actors. They joined screenwriters on the picket line in July to put an end to Hollywood.
The strikes were part of a wave of union activity in the United States this year, including targeted strikes by the United Automobile Workers union. Despite the recent rise, overall union activity has declined since the 1970s and 1980s.
Geopolitics has rethought economic relations
Two wars exposed the fragility of global economic recovery and restructured global trade relations.
Concrete example: the geopolitics of oil. Prices soared above $120 a barrel after Russia’s 2022 invasion of Ukraine, then fell steadily amid rising U.S. oil production and signs of a global economic slowdown . The war between Israel and Hamas has given rise to new fears about a rise in oil prices and a revival of inflation. Despite navigation difficulties in the Red Sea and the Suez Canal, these concerns have not yet come to fruition.
In the war between Russia and Ukraine, India and China have become the main beneficiaries. India, taking advantage of its neutrality, has gone from virtually no Russian oil to buying about half of what the country exports by sea. Trade between China and Russia has also emerged, surpassing $200 billion in the first 11 months of this year.
The United States and China remain deeply linked
Tensions between the United States and China appear to have stabilized after President Biden met with Chinese President Xi Jinping on the sidelines of Asia-Pacific economic cooperation. summit in November.
Economic ties remain strong and new research shows how difficult it is to unravel them. The Trump administration’s tariffs and other trade restrictions have caused China’s share of exports to the United States to decline in recent years, while countries like Mexico and Vietnam have gained ground.
But these countries import intermediate goods from China, meaning U.S. supply chains remain dependent on Chinese production. In fact, China is now the main supplier of industrial inputs, according to calculations in a recent article.
Another reason why the United States cannot easily “disassociate” itself from China: semiconductors. China is a major market for these advanced computer chips, which can be used to power artificial intelligence systems. This fall, the Biden administration tightened its export controls on semiconductors, making it harder for U.S. companies to sell them to China. But major chipmakers like Nvidia are already working on modified chips to sell in Chinese markets, hoping to circumvent the restrictions.
Investments in AI have exploded
This year has seen an explosion of investment in generative AI startups, including Microsoft’s $10 billion backing of OpenAI, announced in January. Microsoft’s relationship with OpenAI has since come under scrutiny, particularly its role in reinstating Sam Altman as CEO of OpenAI after a boardroom coup that triggered five chaotic days at startup. On December 27, The New York Times became the first major U.S. media organization to sue OpenAI and Microsoft over AI-related copyright issues, claiming in the lawsuit that the companies should be held liable for “copying and illegal use of The Times’ unique content.” precious works.
Despite this, investments in this technological area are booming.
Microsoft and Nvidia, the chipmaker, are two of the “Magnificent Seven” that have contributed to this year’s stock market rally.
As the year ended, the S&P 500 continued its bullish rally that surprised many on Wall Street.
How long will it last? That’s a question for the next 12 months.