Key takeaways
U.S. capital markets are following up a strong 2023 with a solid start to 2024.
Capital markets, such as the equity and fixed income markets, match those who have capital to invest with businesses, government entities and entrepreneurs seeking capital to underwrite their plans.
Investors appear encouraged by current economic signals as they assess capital market prospects for 2024.
Capital markets enjoyed a solid rebound in 2023 following a difficult year in 2022, when both equity and fixed income markets suffered significant declines. Equity markets were particularly strong in 2023, with the benchmark S&P 500 index gaining more than 26%, primarily on the strength of strong performance from technology companies. Bond markets overcame a challenging environment to generate modestly positive returns.
“The macroeconomic backdrop for 2024 is one of slowing growth,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “At the same time, inflation has slowed considerably from peak levels reached in mid-2022, though cost-of-living changes remain somewhat elevated compared to what we became accustomed to in recent decades.” Haworth believes the current environment offers potential for both equity and fixed income investors.
While surging inflation and rising interest rates were driving forces in the market’s challenging 2022, the market’s recovery that began in 2023 was supported by declining inflation and surprisingly solid economic growth. In today’s environment, Haworth sees three primary factors at work:
The current capital market environment remains constructive given the ongoing strength of the economy, but investors need to be prepared for periods of market volatility. Ultimately, factors like corporate earnings and the direction of interest rates will have the greatest impact on equity and fixed income markets. However, the potential exists for other events to temporarily impact the markets and potentially contribute to investor uncertainty. Read more about our capital market perspective in our quarterly investment outlook.
Here are answers to some fundamental questions that may help you better understand capital markets and how they work.
Capital markets are a way to bring together individuals or institutions with money (also known as capital) they wish to invest, and various entities that seek money to underwrite costs to meet specific purposes. Capital markets also facilitate the issuance of securities on an exchange, where stocks and bonds are offered by those seeking capital, to be purchased by investors seeking to put capital to work.
Capital markets match those who have capital to invest with businesses, government entities and individuals seeking capital to underwrite their plans.
For example, government entities regularly issue debt securities (bonds) to meet costs for major capital projects or, in the case of the federal government, finance day-to-day expenditures. Investors, in effect, lend money to the government entity by purchasing a bond. The borrower is required to pay interest on a timely basis and repay principal when the bond matures.
Capital markets are most commonly made up of stock and bond markets.
A key to capital markets is the issuance of securities. Entities seeking to raise capital issue debt or equity securities that are exchanged with investors. A corporation, for example, may issue new shares of stock, at a set price. However, once on the open market, the price of a security is generally always changing, reflecting demand in the market.
When raising capital, companies or entities may issue new shares of a stock or bonds, with proceeds from investors going directly to the issuer to meet its current financial purposes. Original issues of stocks and bonds are not always accessible to individual investors, such as in an initial public offering (IPO) of stock. Most individuals purchase stocks on the secondary market, where those who previously purchased stocks or bonds can re-sell the securities they hold.
There are similarities between the two; however, capital markets typically refer to the issuance of new securities to raise capital, while financial markets can refer to all forms of securities trading.
Financial markets encompass a wide variety of exchanges involving traditional securities like stocks and bonds, as well as other types of assets and contracts. Most individuals trade securities on the secondary market.
As you assess your own financial goals, understanding the current and anticipated performance of capital markets may help you more effectively position your assets to achieve your objectives. Discuss your circumstances with your financial professional to help determine the best steps to consider in today’s capital markets.
Our investment strategies are designed to weather all types of market cycles. Learn about our investment management approach.
Rather than trying to time the market, consider holding on to stocks and other securities regardless of market fluctuations.
Bonds are a common investment in times of economic uncertainty, but they also play an important role in diversifying your portfolio.