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A Look Back At 2023 And Forward To 2024

A Look Back At 2023 And Forward To 2024

January 17, 2024

It’s officially the part of the new year where you are no longer allowed to tell people “Happy New Year!” but we’ve barely eclipsed the first half of January. The paint is still drying on 2023 but that’s old news. In the first few weeks of this year we have seen bitcoin transformed into an ETF, inflation reports surprise to the upside, jobs reports surprise to the upside, and the NFL selling playoff viewing rights, pay-per-view style, to a streaming app no one has ever heard of before (Peacock). There is a lot going on and I genuinely believe that now is one of the best times in history to be a long term investor, but before we get into all of that, let’s take a look at what the markets did in 2023.

Below you will find a chart of the major asset classes, with the S&P in dark blue returning 26%. That dotted line is the magnificent 7 (Apple, Amazon, Meta, Microsoft, Nvidia, Tesla) which accounted for a large portion of the markets returns and on a standalone basis returned 76%.

Source: Bloomberg, data as of 12/31/2023

There is no doubt that concentration played out well for the stock market in 2023. In fact, JP Morgan reports that the largest 10 stocks in the S&P 500 were responsible for 86% of the S&P 500 return. They are also more expensive, but more on that later.

On the fixed income side of the market, 2023 was a rollercoaster ride. At the beginning of the year, everyone was predicting higher rates for longer. By the end of the year, those same market forecasters were served their second serving of humble pie, as rates cooled during Q4.

Source: Bloomberg, data as of 12/31/2023

The biggest surprise of 2023 in my opinion was, and continues to be, the resilience of the economy. In the face of one of the most aggressive Fed tightening sequences in decades, the US economy showed enormous resiliency. Households and corporations continued to spend and invest, and the higher rates that would normally have curbed borrowing in the private sector, have not yet dented growth this cycle. This is mostly because under the post-Covid stimulus both households and businesses were able to burn down cash from their balance sheets. Below is a chart of year-over-year GDP growth in blue, with consensus forecast in white.

Source: Bloomberg, data as of 12/31/2023

The biggest threat to retirees, inflation, which appears to have peaked in June of 2022 seems to be contained and much closer to its long-term average of 3.5%, but this is still a decent distance from where the Fed would like it to be at 2%. We don’t foresee how inflation could suddenly fall lower, given the strength in the labor market (wage growth remains way above Core or any inflation metric we track).

Source: Bloomberg, data as of 12/31/2023

Ok so a quick summary, the stock market had a fantastic year of 26% return on the S&P 500. However, a great majority of that was from the 10 largest stocks. The fixed income market caught everyone by surprise with yields rising and then falling again. Last but not least is the US economy, which continues to grow with a strong labor market and the worst days of inflation behind it. All of this begs the question of what’s the setup for 2024?

The stock market by and large is “more expensive” than it’s 10-year average. Right now it looks like greater sales growth and margin expansion are baked into stock prices, which is a good thing in the near-term. On a market-cap weighted basis, much of this is coming from the magnificent 7, all of whom share: above GDP sales growth, high margins from their economic moat, and a front seat at the AI revolution.  Essentially, what the equities markets are discounting right now is a combo of above trend sales growth, lower interest rates from the Fed and an AI-induced productivity boom that will expand profit margins which, in combo, will increase earnings for stocks in 2024. Even better is that the major indexes (global ex-US, emerging market, US) are above their 12-month moving average, where volatility is an outlier.

When it comes to the fixed income market, there is tension that will need to unwind. Said simply, there is a lot of debt out there that will be maturing and need to rollover to higher rates. All of which is happening during a stock market era of risk taking and high-growth style prices. The best case is that we have few defaults and future lower rates for borrowers with minimal inflation risk. Either way, there are great opportunities in the fixed income market to get strong yield in high rated areas, which will benefit retirees with short-term cash needs.

The biggest wild card this year is the election. A lopsided victory by either party would probably be viewed with hesitancy by the markets.  We imagine the market would prefer gridlock, so the more extreme policies of either party would be kept in check.

In either case, our research of recent elections makes clear that stocks, on average, do well no matter who gets elected President. Incumbents make for modestly better returns before and after the election than new presidents. Markets seem excited before a Republican gets elected and then less so after, while Democrats have the opposite effect. The chart below shows results of each election and corresponding market returns. However, with the current conflicts in the middle east and Ukraine, a change in leadership could trigger flight to safety trades.

Source: Bloomberg

What Does It Mean To Me?

My father changed the name of this newsletter to the Weekly Brief and I am already near 1,000 words (sorry dad!). As an investor, it’s very useful to take a look at what has happened in the markets, what is being reflected in prices, what the potential risks are, and then move forward. Ultimately, it’s not a case of who is right and wrong, but which path are you the most comfortable with. I believe the best investment strategy for anyone is the one you can stick to in confidence. Being informed is a great way to increase the likelihood doing so. Building a financial plan that identifies your money needs in different time slices (ex., 1-year, 3-year, 5-year+) and then invests with those targets in mind is the path that we recommend and implement. Taking the appropriate amount of risk for the appropriate amount of time is how the best investors sleep at night. Because most people don’t care about the market, they just want to know “am I going to be alright?” That’s all that matters, and we’d love to talk about it with you.