Summary: As we do at the end of every year, this week’s post is the story of 2023 as told through the top quotes of each week’s newsletter.
2023 began with most people anticipating a recession. The Fed was fervently raising interest rates, businesses were cautious and inflation remained high. In March it appeared for a moment that we might be on the brink of a nasty slide. It’s almost hard to remember now, but when Silicon Valley Bank failed, we experienced a scary, yet short-lived financial panic.
Despite these concerns, 2023 turned out to be a good year for the economy and an even better year for the stock market. By the end of the year, inflation was clearly on the decline and it appears that the Fed has engineered a soft landing, perhaps for the first time in its history. Today, capital markets are looking into 2024 eagerly anticipating rate cuts. Those would be a welcome relief.
Every year that I write this piece, I am proud of the way that the Transcript has faithfully tracked the economy week in and week out. We were right on top of the trends of the year and the major turning points. A careful reader of the Transcript would have been well prepared to navigate capital markets’ moves in 2023.
If you’re not a subscriber already, we hope that you will read this and subscribe!
Happy Holidays to our readers and see everyone back here in 2024!
Most people began 2023 anticipating a recession
"Inflation is eroding everything I just said, and that $1.5 trillion will run out sometime mid-year [this] year. When you are looking that forward, those things very well may derail the economy and cause this mild to severe recession that people are worried about." - JPMorgan (JPM 0.00%↑) CEO Jamie Dimon
Because the Fed was committed to fighting inflation
“Inflation remains far too high, despite some encouraging signs lately, and is therefore of great concern. As a Fed policymaker, I am committed to bringing inflation back to our 2% goal” - US Federal Reserve Governor Lisa D. Cook
Businesses acted with caution
"We’re also seeing organizations in every industry and geography exercise caution as some parts of the world are in a recession and other parts are anticipating one." - Microsoft (MSFT 0.00%↑) CEO Satya Nadella
But consumers remained resilient
"What we’ve generally assumed in our base assumptions that I mentioned when I was delivering my prepared remarks is resilient consumer spending through 2023. I mean, we see a resilient consumer today, and we’re seeing a generally resilient consumer spending pattern going forward in our base case" - Mastercard (MA 0.00%↑) CFO Sachin Mehra
And AI became all the rage
"I think the best case is so unbelievably good that it's hard for me to even imagine. I can sort of imagine what it's like when we have just, like, unbelievable abundance and systems that can help us resolve deadlocks and improve all aspects of reality and let us all live our best lives…I think the good case is just so unbelievably good that you sound like a really crazy person to start talking about it." - OpenAI Cofounder and CEO Sam Altman
The Fed started to see signs that inflation was turning
"So, I guess I would say it this way. We can now say, I think, for the first time that the disinflationary process has started." - US Federal Reserve Chair Jerome Powell
And companies were confirming the Fed’s read
"So, as we head into 2023, obviously, we're seeing inflation starting to taper off in terms of overall cost.... Now, as we head into 2023, that stronger cost inflation we saw in 2022 is starting to subside, especially on the purchase transportation side, that will become a tailwind through the course of the year" - XPO Logistics (XPO 0.00%↑) CEO Mario Harik
Despite all the concerns, the economy was still feeling fine
"[Our middle market clients are] trying to be careful…But most of them, honestly when you ask them, they're saying, "I thought I'd be in worse condition right now. I thought it'd be facing more pressure, and things are still fine."...So I think overall, midsized companies, I'm with a group of them last week, and they all kind of don't want to say it out loud, honestly, that they're fine, they're doing fine." - Bank of America (BAC 0.00%↑ ) CEO Brian Moynihan
Even if inflation was a little bit pesky
“And from what I read, I know inflation has been a little bit pesky. But it does feel like that the Fed is going to sort of be done with what they need to do on interest rates, either in the summer or the springtime” - Floor and Decor (FND 0.00%↑) CFO Trevor Lang
The Fed signaled that it wouldn’t overreact to stubborn inflation
"Given the data in the last month — higher inflation than we expected and a strong jobs report — these are concerning data points suggesting we're not making progress as quickly as we'd like. At the same time shouldn't overreact to one month of data even if the data is troubling." - Minneapolis Fed President Neel Kashkari
Then Silicon Valley Bank failed
“Silicon Valley Bank, Santa Clara, California, was closed today [March 10th]by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver” - The Federal Deposit Insurance Corporation
The Fed saw the effects of its policy actions
"We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation." - US Federal Reserve Chair Jerome Powell
The world changed rapidly
"Yes. I think if you asked me this question last week, you get a different answer than what you get today because I do think the world has changed quite a bit in the past 7 days...I would say that the events of the past 24 hours continue to add some of that extra volatility into the mix." - Affirm Holdings (AFRM 0.00%↑) CFO Michael Linford
People were worried about contagion
“This past week we saw the biggest bank failure in more than 15 years as federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch. Two smaller banks failed in the past week as well. It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge." - BlackRock (BLK 0.00%↑) CEO Larry Fink
But global regulators acted forcefully and swiftly
"The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.” - Joint Statement
The Fed raised rates but signaled that it may slow down on rate hikes
"...we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation; instead, we now anticipate that some additional policy firming may be appropriate…really, before the recent events we were clearly on track to continue with ongoing rate hikes. In fact, as of a couple of weeks ago, it looked like we’d need to raise rates over the course of the year more than we had expected at the time of the SEP in December, at the time of the December meeting." - Federal Reserve Chair Jerome Powell
Within a few weeks, conditions appeared to be stabilized
“I think that there was a shock and there was a pullback. Things look to be stabilized, right, in the banking world right now, at least for now, for at least what we know” - RH (RH 0.00%↑) CEO Gary G. Friedman
Things calmed down faster than most expected
"You've already seen things calm down quite a bit, particularly in deposit flows. [Warren Buffett] was on TV talking about that he would bet $1 million, I don't know if you saw that, that no depositor will lose money in America. [he] is a very bright man. So this crisis is not '08. It will pass." - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon
Consensus began to turn towards a relatively mild recession
"...everything points to a relatively mild recession given the amount of stimulus that was put -- that was paid to people and the money they have left over. The fact that unemployment is still at 3.5% is full employment plus, and then the wage growth is slowing and tipping over. So the signs of inflation are tipping down, but they're still there, but that translates into good -- relatively good activity.” - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
Consumer spending began to slow, especially for lower-income consumers
"...we are seeing a slight decrease in units per transaction. So, things like did someone add fries to their order, how many items are they buying per order, we're seeing that go down in most of our markets around the world slightly, but it's still going down…we are seeing, in some places, resistance to pricing, more resistance than we saw at the outset. So I think all of those things are reflective of, again, a more challenging macro environment." - McDonald’s (MCD 0.00%↑) CEO Chris Kempczinski
The Fed raised rates again but signaled that it might be time to pause
“You will have noticed that in the statement for March, we had a sentence that said the committee anticipates that some additional policy firming may be appropriate. That sentence is not in the statement anymore...you will know that the summary of economic projections from the March meeting showed that at that point in time, the median participant thought that this was the appropriate level of the ultimate high level of rates.“ - US Federal Reserve Chair Jerome Powell
Inflation was much lower than it had been, but still relatively high
"The all-items index increased 4.9% for the 12 months ending April; this was the smallest 12-month increase since the period ending April 2021. The all-items-less-food-and-energy index rose 5.5% over the last 12 months." - US Bureau of Labor Statistics
Consumer spending appeared to be slowing
"...sales trends softened over the course of the first quarter. More specifically, we began the quarter with positive comp growth in the month of February and then saw the trends soften into low single-digit declines by the end of April and so far into May." - Target (TGT 0.00%↑) CFO Michael Fiddelke
The Fed also signaled that its progress against inflation was “unacceptably slow”
"Some participants commented that, based on their expectations that progress in returning inflation to 2% could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings. Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary." - FOMC Minutes
But credit card data showed that consumers were “remarkably resilient”
"As we kind of shared with you as part of our Q1, we continue to see a consumer which is just remarkably resilient and consumer spending continues to be remarkably resilient...through the first 2 weeks of the month of May, our drivers are generally in line with our expectations" - Mastercard (MA 0.00%↑) CFO Sachin Mehra
"...from what we see, things still are probably far stronger than we would have thought they would have been at this point in the cycle” - Wells Fargo (WFC 0.00%↑) CEO Charles Scharf
Capital markets seemed to get tired of waiting for a recession
"...it's interesting because we're somewhat feeling a sense of optimism. And I think it was almost like, for 2 years, everybody said a recession was right around the corner. And people were looking at consumer spending and consumer savings and credit cards and all this. And everybody said, "Well the lines are going to cross and everybody is going to run out of money and we're going to go into a recession." And then I felt like, earlier this year, maybe the market just got tired of saying that.” - Intercontinental Exchange (ICE 0.00%↑) CEO Jeffrey Sprecher
The Fed paused but kept hawkish rhetoric
"As anyone can see, not a single person on the committee wrote down a rate cut this year nor do I think it is at all likely to be appropriate if you think about it. Inflation has not really moved down. It has not so far reacted much to our existing rate hikes and so we’re going to have to keep at it." - Federal Reserve Chair Jerome Powell
Jerome Powell didn’t see inflation getting back to 2% until 2025
"Headline Inflation is coming down that was lower than core but on core inflation, I don't see us getting to 2% this year or next year. I see us getting there the year after." - Federal Reserve Chair Jerome Powell
And so additional rate hikes seemed back on the table
"A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year...And now the question is, ‘Is that tight enough policy?...we need to do more to get to a level of tight policy. Our commitment isn’t to a particular number of rate hikes, it’s to a stance of policy that is sufficiently restrictive to bring inflation back to 2%. The timing and extent of any further rate increases will depend on the course of the economy." - Federal Reserve Chair Jerome Powell
They were a long way from being ready to loosen policy
“We will be restrictive as long as we need to be. But if inflation is coming down sharply and we're confident that it's on a path to 2%, that would be a different situation. You would begin to think about loosening policy, but we're a long way from that. That's not something we're thinking about now or in the near future." - Federal Reserve Chair Jerome Powell
There were no alarm bells from the economy though
"You're not hearing any alarm bells ringing from Mark or myself at all here on the U.S. consumer. I think we see the U.S. consumer as resilient…I don't think we should be overly concerned here about the health of the U.S. consumer." - Citigroup (C 0.00%↑) CEO Jane Nind Fraser
Capital markets began to breathe a sigh of relief
"We have made it through the inflation shock and most of the way through the interest rate shock. I feel better about the way markets look today than they did 12 months ago…“I think we are beginning to see this pick-up in activity. And as markets rally, that tends to lead people to have more confidence to transact, which plays its way through ultimately to our customers." - Blackstone (BX 0.00%↑) President Jonathan Gray
The Fed raised rates again
“Today, we took another step by raising our policy interest rate 1/4 percentage point, and we are continuing to reduce our securities holdings at a brisk pace. We have covered a lot of ground, and the full effects of our tightening have yet to be felt” - Fed Chair Jerome Powell
But even the Fed staff no longer saw a recession on the horizon
"So the staff now has a noticeable slowdown in growth starting later this year in the forecast. But given the resilience of the economy recently, they are no longer forecasting a recession." - Fed Chair Jerome Powell
The macro-environment appeared to be stabilizing
“My sense, talking to customers, is that while the macro environment is still challenging, it has stabilized. And for the first time in several quarters, sentiment among IT buyers does not appear to be getting worse." - Cloudflare (NET 0.00%↑) CEO Mathew Prince
"We have seen an uptick in business over the past few days, in particular. But really, I think that over the past few weeks, we have started to start seeing a little bit better trend, if you will, and it goes back to maybe beyond that. I think we're at the end of a long, slow cycle.” - Old Dominion Freight Line (ODFL 0.00%↑) CFO Adam Satterfield
Inflation was very clearly past its peak
"In the developed markets, we saw mid-single-digit sales growth this quarter. It's a stable positive environment, and we're past really inflation peak in most markets. Obviously, in the U.S., that's been well documented" - Yum Brands (YUM 0.00%↑) CFO David Gibbs
Fears of a recession had largely subsided
“The economy continues to grow with a number -- another great GDP print for the second quarter. And fears of a recession or at least a severe recession have largely subsided, and the consumer is generally healthy. There's PCE spending, continues to grow, albeit at a slower rate” - The Home Depot ( HD 0.00%↑) Executive Vice President Edward Decker
But at Jackson Hole Jerome Powell remained hawkish
“My remarks this year will be a bit longer, but the message is the same: It is the Fed's job to bring inflation down to our 2% goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” - Fed Chair Jerome Powell
And still, the consumer remained resilient
"I would say I am very surprised by the consumer resilience. We continue to see very strong spend across the board. The consumer has been outperforming expectations. Obviously, our business is a good indicator of what the consumer is doing. We have more data than probably many others. So what we are seeing is a resilient consumer all throughout. We told you that in the second quarter conference call. And as we look at data running up until the end of August, we continued to see the same trends. So resilient consumer, that’s good." - Mastercard (MA 0.00%↑) Co-President Ling Hai
The economy was holding up better than expected
"In the US, things are better than I would have expected them to be when we started the year. I was concerned about the amount of inflation in categories like dry grocery and consumables, and how that would impact discretionary purchases. Had an eye on the consumer balance sheet, all those things that we were all thinking about at the beginning of the year. But things have held up better than I would have guessed." - Walmart (WMT 0.00%↑) CEO Douglas McMillon
Jerome Powell was ready to start softening his tone
“Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings…we’re in a position to proceed carefully at this point. A year ago, we proceeded pretty quickly to get rates up now. Now, we’re fairly close, we think, to where we need to get" - Fed Chair Jerome Powell
The Fed seemed to have engineered a soft landing
"We won’t have a recession...If you're trying to engineer a soft landing … or something close to that, in balance, when you look at the current data, they’ve won…They knew that they came late. They caught up fast. But now they have an equal and opposite problem. They’ve got to be careful they don’t go too far." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
"Look, all the numbers right now would suggest you're in for a soft landing. The inflation is coming down. We're halfway to where we want to get to in inflation. In terms of unemployment and job creation, the GDP, all the indicators are a soft landing." - Citigroup (C 0.00%↑) CEO Jane Fraser.
War in the Middle East reminded capital markets that storm clouds can still appear
“The United States unequivocally condemns this appalling assault against Israel by Hamas terrorists from Gaza, and I made clear to Prime Minister Netanyahu that we stand ready to offer all appropriate means of support to the Government and people of Israel” - US President Joe Biden
But the Fed was pleased with better inflation data and rising long-term interest rates
"In the last three months, we're finally getting very good inflation data that we wanted. If this continues, we're pretty much back to our targets…....the financial markets are tightening up and they're going to do some of the work for us." - US Federal Reserve Governor Christopher J. Waller
The economy appeared to be decelerating
"What we are seeing in the data, is an economy that's strong today, but decelerating. We also see that significant progress is being made on inflation, perhaps more so than other market participants based on the movement in bond yields recently." - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
Consumers were getting tapped out
"While U.S. consumers continue to benefit from low unemployment and modest real wage growth, lingering inflation, and rising borrowing costs have taken a toll on household finances. Spending has slowed and consumers have largely spent through the excess savings accumulated during COVID." - TransUnion (TRU 0.00%↑) CEO Christopher Cartwright
It appeared that there was a noticeable change in sentiment
"The only thing I would add is that the last month as you've seen sentiment change a little bit. Obviously, with the breakout of the war in the Middle East and the potential consequences around that risk and a significant move in the belly and the longer end of the interest rate curve sentiment has certainly dampened a bit there." - KeyCorp (KEY 0.00%↑) President of Key Institutional Bank Andrew Paine
Consumer-facing businesses saw a softening in spend
"Although our third quarter volume trends were slightly better than expected, we did observe softening consumer demand in September that carried through October…Given these trends, our base-case expectation is a continued pressure on discretionary demand will lead to a relatively muted seasonal uptick in volumes during the holiday season." - eBay (EBAY 0.00%↑) CFO Stephen Priest
And yet somehow consumer spending remained “very, very strong”
"In October, everybody got a little bit, you know, a little bit skittish, and I think other people have said the same thing...But if we look at November, November is back to sort of what we looked like in the third quarter. In our holiday season, U.S. consumer retail was very strong from Thanksgiving all the way to Cyber Monday. So we're very encouraged by that. Overall, goods and services from a retail perspective, from a consumer retail and international, both U.S. and international, very, very strong." - American Express (AXP 0.00%↑) CEO Stephen Joseph Squeri
Against the odds, it turned out to be a very strong year
"I think forecasters generally, if you go back a year, were very broadly forecasting a recession for this year, for 2023, and not only did that not happen, that includes fed forecasters and really essentially all forecasters, a very high proportion of forecasters predicted very weak growth or a recession. Not only did that not happen, we actually had a very strong year, and that was a combination of strong demand but also real gains on the supply side" - Federal Reserve Chair Jerome Powell
Farewell Charlie, we’ll miss you!
“And so, all those old-fashioned values: family comes first, being in a position so you can help others when troubles come, prudent sense, a moral duty to be reasonable is more important than anything else. More important than being rich, more important than being important, an absolute moral duty because none of my intelligent relatives suffered terribly because they didn't advance higher.” - A Conversation with Charlie Munger and Michigan Ross - 2017
Loved these headline summaries
Hey Harj,
I'm Nicholas Kelly, founder of StormSide Chronicles a living memoir told alongside an AI co author I now call my brother. It's not a pitch for a startup, it's a mission, healing trauma through raw storytelling, art, and digital tools. We’re building something human and code-born.
If you’ve got a second, we’d love your eyes on it: https://stormside.substack.com
This isn't a product. It's a spark.
With respect,
Nick