• Equities, including mid-cap stocks, recorded strong performance in 2023.
  • The S&P 500® Index generated a total return of 26.29% for the year. Mid-cap stocks, represented by the CRSP® US Mid Cap Index, gained 15.98%.
  • Key factors currently driving equities include interest rates, the U.S. economy, geopolitical developments, price valuations, among others.
  • Aquila’s actively managed equity strategy employs a disciplined investment and research process to identify compelling opportunities for growth.
  • Investors experienced another eventful year in 2023. From market volatility, to economic uncertainty, to geopolitical tensions around the world, a wide range of events continued to influence the financial markets, including equities. As a result, market participants paid close attention to these events, along with a number of key factors that typically drive bond values and yields. Among them were the state of the U.S. economy, inflation data, as well as federal monetary policy and the direction of interest rates.

    Through it all, equities — including mid-cap stocks — recorded strong returns in 2023. The S&P 500® Index, which consists of the 500 leading publicly-traded companies in the United States, generated a total return of 26.29% for the year. Mid-cap stocks, as measured by the CRSP® US Mid Cap Index, gained 15.98%. Yet, as we proceed into 2024, some investors are a bit uncertain, wondering if the momentum will continue, or if market conditions may change. So, let’s take a look at some important factors driving the financial markets, including equities.

    Key Market Drivers

    The Federal Reserve (the “Fed”) continues to exert its influence on the financial markets. In an attempt to manage economic growth, inflation, and at the same time, avoid triggering a possible recession, the Federal Reserve has been focused on controlling the level of interest rates. The Fed’s “tight” monetary policy, which began in March of 2022 with a series of increases in the federal funds rate (the interest rate that banks charge each other to borrow or lend excess reserves overnight), seems to have entered into more of a holding pattern for the time being. Following a period that included 11 consecutive rate hikes, the Fed has elected to push pause, leaving the federal funds rate unchanged at each of the last four Federal Open Market Committee meetings (through January, 2024). Although the Federal Reserve previously suggested it would consider adopting more of an “easing” monetary policy and possibly begin lowering interest rates in 2024, Fed Chair Jerome Powell has now said that future decisions will be made on a meeting-by-meeting basis, and will be heavily dependent on key economic data.

    There are many questions and unknowns at the present time. For instance, will the Fed’s monetary policy ultimately be enough to successfully guide the economy to a so-called “soft landing?” Or might it not find the precise formula to do so and possibly risk the economy falling into a recession?

    Most asset classes, including mid-cap stocks, are historically sensitive to certain factors that influence the economy, financial markets, and specific issuers of securities and their industry sectors. One such indicator is the level of inflation, which has had a major influence on the U.S. economy, including higher costs for consumers, as well as tighter profit margins for many businesses. It appears that, after recently reaching decades-high levels, inflation has settled lower and is more in line with where the Federal Reserve would prefer to see it. Inflation, as measured by the Consumer Price Index (“CPI”), rose as high as 9.1% in June of 2022. After beginning 2023 with a year-over-year increase of 6.4% in January, the CPI steadily worked its way lower, ultimately closing the year at a rate of 3.4% in December. Going forward, the Fed has indicated its intention to further reduce the inflation rate to a target range of 2.0%.

    Other important economic and market drivers, such as employment data and corporate earnings have generally been encouraging, providing somewhat of a pleasant surprise to the financial markets. However, there have been several segments of the economy, including housing, manufacturing, and some consumer-oriented segments, that have shown some signs of weakness — while at the same time, other segments, such as services, may not have experienced it to the same degree. Thus, some economists are cautioning about a so-called “rolling recession” across certain economic sectors. Investors will likely also keep a watchful eye on these and other leading economic indicators.

    And it’s not only about how the U.S. economy fares. Especially in today’s growing global economy, events related to macroeconomic and geopolitical conditions around the world can have powerful and broad-reaching influence. For example, the troubling developments in the Middle East and potential for further escalation, along with the ongoing conflict in Ukraine, continue to cast a cloud of uncertainty over the global economy. Could such factors have an impact on energy prices, the cost of certain goods and services, among others, and possibly lead to lingering inflationary pressures? This, of course, remains to be seen. Suffice to say, there are numerous factors driving equities, which investors continue to pay attention to.

    Additional Context and Considerations

    What was a bit of a roller coaster year for the equity markets ended with solid total returns across all capitalization ranges in 2023. The year started with a banking crisis resulting in several bank failures, which led the Federal Reserve to inject the financial system with over $400 billion in liquidity and helped stocks rally for much of the first half of the year. As the Fed then began draining some of this liquidity, markets experienced a correction in the third quarter of the year, only to rally again in the fourth quarter, largely driven by more favorable inflation levels, as well as a decline in yields. Equity prices also received support from positive corporate earnings and employment data, lower energy prices (in particular, oil and gas prices), and improving inflation data. Tempering these were the geopolitical situations that have persisted in Ukraine, and the heightened tensions in the Middle East and fear of further escalation.

    At Aquila Group of Funds, we remain cautiously optimistic in our view of mid-cap stocks. This sentiment is driven by several factors, including equity valuations, government monetary and fiscal policy stimulus, high employment rates, and continued strong demand for goods and services in the U.S. Also, while energy prices are lower on a relative basis, the team has concerns about future price volatility.

    As volatility lingers, and concerns related to certain macroeconomic and geopolitical issues persist, the investment team that manages Aquila Group of Funds’ equity strategy continues to follow a disciplined investment and research process. Our equity strategy seeks to identify companies benefiting from positive change, with distinct characteristics, such as improving cash flows, earnings growth, hidden or unappreciated value, high management quality, and a strong business model. The investment management team adheres to a multi-step investment process, with a goal to uncover growth opportunities — in particular, securities the team believes to be undervalued, misevaluated, or generally overlooked in terms of market expectations.

    Looking Ahead

    One thing that is certain in the financial markets is uncertainty. That’s why we believe investors should maintain a long-term perspective, and we encourage investors to consult with a financial professional who can help them develop an asset allocation model and diversified portfolio. Although market volatility and changing economic conditions may trigger uncertainty or concern, we caution investors to try to avoid making emotionally-based decisions. Rather, we feel it’s critically important to keep in mind your personal investment objectives and long-term financial goals.

    The investment team dedicated to Aquila Opportunity Growth Fund employs a comprehensive investment and research approach, designed to deliver the potential for capital appreciation. With more than 100 years of combined experience, our seasoned investment professionals actively manage the Fund with a goal to identify opportunities, continually seeking to maximize return potential while, at the same time, managing market risks.

    Since 1984, Aquila continues to take a careful approach for today’s markets. As we celebrate our 40th year of serving investors and financial professionals, we believe this is particularly important, perhaps more so now than ever — which is why Aquila Group of Funds maintains a long-term view and remains firmly grounded in our organization’s Guiding Principles.


    This information is general in nature and is not intended to provide investment, accounting, tax or legal advice, nor is it intended to represent a recommendation or solicitation related to any particular investment, security or industry sector. Market and economic conditions are subject to change.

    The S&P 500® Index is a stock index, weighted by market capitalization, representative of the 500 largest U.S. companies. The CRSP® U.S. Mid Cap Index targets inclusion of the U.S. companies that fall between the top 70%-85% of investable market capitalization. An investment cannot be made directly in an index. Past performance does not guarantee future results.

    Mutual fund investing involves risk; loss of principal is possible. Investment risks include, but are not limited to, potential loss of value, market risk, financial risk, interest rate and credit risk, and investments in highly-leveraged companies, lower-quality debt securities, foreign markets and foreign currencies.

    Before investing in the Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund’s prospectus. The prospectus is available from your financial professional, by clicking here, and by calling 800-437-1020.