The U.S. moved up, while China moved down in 2023. A rare occurrence considering their close economic ties.

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Why it matters to you: 2023 as a year in review will be crucial for investors to note for 2024. 2024 will bring new challenges and opportunities. But many of the factors of 2023 will still come into play for the year.

A Rare Turn of Events

2023 can best be described as the tale of two markets. More specifically, for the U.S. and China. Both are the biggest economies, contributing almost half of the world’s gross domestic product (GDP). The U.S. markets were up with the Nasdaq and S&P 500 rising by 43% and 24% respectively. Meanwhile, the Chinese markets trended downwards with the Shanghai Composite Index and Hang Seng China Enterprise Index declining by 1.8% and 1.4% respectively.

It is rare to see both markets go in the opposite direction in a given year. The reason is simple. The U.S. imports the most from China (China imports consist of 19% of U.S. total imports), and China exports the most to the U.S. (Exports to the U.S. consist of 16% of China’s total exports) (Source: OEC).

Let’s go to the U.S.

All seems well in the U.S. In my opinion, the biggest factor was inflation. It has declined from a high of 8.0% in 2022 to an average of 4.2% in 2023 (January to November). Crude oil and natural gas prices have declined from their highs in 2023. This has led to the Federal Reserve (Fed) pausing its interest rate hikes. Higher interest rates were needed to reduce consumption and investment and bring down inflation. The effect of this was slower economic activities, which led to lower corporate profits and share prices. Furthermore, investors were worried about a recession with interest rates so high. That has not happened yet. The economic growth of the U.S. remains steady at an average of 2.3% from 1Q 2023 to 3Q 2023.

Next, to China

And all is not well in China. Optimism in China quickly evaporated by the middle of 2023. The numerous bans by the U.S. and indirectly other countries also led to bad sentiments among exporters in China. A deep-rooted problem in the property sector also kept many consumers in China from spending. Housing is severely unaffordable in China with the house price to household income ratio one of the highest in the world at 30 times. China’s prospects in 2024 remain clouded.