February 15th, 2024
2023 Market Review
After a rough 2022 in the equity (worst year since 2008) and fixed-income (worst bond market since 1870) markets, 2023 was a nice rebound year. We saw the Dow Jones return just over 13%, the S&P 500 rallied over 24% (bolstered by technology), and the US Aggregate Bond Index gained over 5% after being negative most of the year. At the beginning of 2023, there were many uncertainties with the market. There were talks of a potential recession, inflation that was still stubbornly high, the ongoing Russia / Ukraine situation, and the world was still adjusting to the decisions made during 2020. Despite these fears and uncertainties, we saw markets return a good amount of the value lost in 2022.
2023 Market Drivers:
- The Federal Reserve: “Don’t fight the FED” is a common investment phrase. The FED was certainly the 800 lb gorilla in 2022/2023 as they increased the baseline Federal Funds Rate range from almost 0% to 5.25%-5.50% with the last hike in July. Recent financial markets have been strongly dictated by whether the Fed is expected to hike, pause, or cut rates. Throughout the middle of the year, markets expected the Fed to hike interest rates longer and higher than the level reached in July. In October, the Fed indicated they were most likely done raising rates for the year, and we saw a very nice rally in November and December to end the year.
- “The Magnificent 7”: Seven major tech companies (Microsoft, Apple, Alphabet, Amazon, Tesla, Meta, and Nvidia) helped bolster the S&P 500 in 2023. The boost of Artificial Intelligence (AI) provided a massive upswing to certain companies positioned to take advantage of what could be a transcendent advancement in technology. Due to the size of these 7 companies, they make up a large portion of the S&P 500. Conversely, the equal-weight S&P 500 index was only up 8% on the year.
- Diversification is still important! While these companies outperformed in 2023, many growth and tech companies took a major hit in 2022. While being in all tech in 2023 sounds nice, if you were all in the tech-heavy NASDAQ in 2022, you would have lost around (33%). A (33%) loss requires a positive 49-50% return to get back to its previous level. Compound interest is your best friend on the upside but worst enemy on the downside.
- Did the FED pull off a soft landing?: There are more hopeful comments that the FED could pull off a soft landing instead of dragging the economy into a recession. It’s a delicate dance following years of FED policy of 0% interest rates, coupled by a rapid rise in rates in 2022/2023. After the increase in inflation post-Covid, the FED is now trying to bring down inflation while simultaneously attempting to keep unemployment low. CPI Inflation fell to an annual rate of 3.1% in November, down from 6.5% in December 2022. Core fell to 4% from 5.7% in December 2022. With this downward trend in inflation, unemployment still remains below 4%. While the economy has shown resilience in 2023 from the interest rate increase by the FED, the economy is slowing some as we continue coming down off the “sugar high” from the record cash infusion of the Covid stimulus packages.
- Company Earnings: Earnings are the life blood of the markets. While earnings growth was only at 0.4% for the S&P 500 for 2023, companies continually beat expectations. In Q3 earnings for the S&P 500, 80% of companies beat earnings expectations. Q2 was 79%, Q1 was 77%, and Q2 2022 was 68%.
- Yields are Back: After years of 0% interest in savings accounts, with the rapid rise in interest rates, income returned in 2023. Bonds finished the year up over 5% after being negative until November / December. While the aggregate bond index got pummeled in 2022 because of rising interest rates, there are now intermediate core bond funds with yields over 4%. With the outlook of interest rates potentially coming down, this may provide solid returns for fixed income in the future. A positive side to the rate increases in 2023 allowed many money market funds to pay over 5%. We’ve gotten used to historically low interest rates since the financial crisis in 2008, but now there are ways to earn some returns on cash again.
For 2023, a combination of better-than-expected earnings, strong performance in technology and growth companies, a decrease in inflation, pause in rate hikes, and simply rebounding from the 2022 bear market drop led to a nice rebound in the markets.
What’s to come in 2024?
- Slower economic growth?: 2024 is projected to be a slower economic growth year than 2023. (***Remember, we may be simply coming down from unsustainably high growth levels after Covid re-openings.) Consumers are buying more essential items instead of splurging on larger purchases and overall savings are decreasing some. However, consumers have continued to show tremendous resilience since inflation reared its ugly head a couple of years ago. Only time will tell how tight Fed policies (higher interest rates) affect the economy in 2024.
- FED move too far, too fast?: Historically, the FED is behind the curve and reacts too late. After a rapid increase in rates in 2022 & 2023, there are now expectations of 3 FED rate cuts, most likely in the back half of 2024. This will depend on inflation readings and the state of the economy. While we are slowly getting closer to 2% core inflation, the FED wants to make certain it is under control.
- Stock Valuations: After falling hard in 2022, valuations rebounded with the market in 2023 and are a little stretched at the moment. Volatility, and even a correction wouldn’t be a bad thing as this is normal and healthy to keep prices in check. Stock valuations, however, can continue to stay elevated for longer than expected (think the late 90’s).
- Cash is King again…. but for how long?: For 15 years, interest rates were kept at 0% and the cash we earned in the bank was just pennies on the dollar. As most of you know, there is income or interest in the world again due to the increase in interest rates. While this is a welcomed change, history has shown that it may not last long. During the last 2 FED rate hikes in 2001 and 2007, after money market rates hit their peak, 1 year later those yields were cut in half. So, while 5% for your cash is very nice, it could be back to 1-2% in the following year or so. History has also shown that during these FED rate pauses, the following 12 months for stocks and bonds has been very good. Remember November and December 2023, this was mostly due to the market acknowledging the FED rate hike pause. While this was a very nice rally, if history repeats, there could be more to come.
- Other risks?… (US Presidential election, Geo-political, Headlines) You don’t have to look very far to know there is a lot going on in the US and around the globe. Our connected world makes sure we stay constantly informed. The older I get, I am not convinced this is always a good thing. Unplugging every now and then can be a great thing for the soul… I digress. The year 2024 could be a wild ride, so buckle up and set proper expectations. However, just because the political scene and media frenzy is doing their thing, doesn’t mean the market has to follow suit. If companies are still making money (or expected to do better) and people still have a job and spend money, the market can still make money. Looking back (and forward) there will always be reasons not to invest. We encourage you not to let fear and emotions get the best of you.
The market and economy are still working through the effects of the decisions made during 2020, but in the end, markets tend to find a way to make money. Plus, if you follow consumer confidence trends, the worst time to invest is when people “feel” the best and the best time to invest is when people “feel” the worst. Consumer confidence hit record level lows in 2022 and despite being higher now, it is still well below the average. This could be an indicator the market continues climbing that “wall of worry.” Also, keep in mind the average annual intra-year declines of the market is (14.2%), while calendar year returns were positive 33 out of the last 44 years. Over a longer period of time, the market is positive approximately 80% of the time, and 2023 was a good example that betting against the market normally isn’t a good idea, even when you may feel compelled to do so.
We are in the process of scheduling some reviews but if you have any immediate questions or want to get on our schedules, please give us a call.
Jeremy