Investment Outlook: Unexpected Things in Life

Investment Outlook: Unexpected Things in Life

January 10, 2024

Reflections

As we put 2023 behind us and welcome in 2024, it is a time to reflect on the year that just passed and consider how to adjust the course going forward. As I reflect, I am struck with how different the year turned out than I expected. Last January, I thought 2023 would look similar to the prior year, with a few known changes ahead: sending my oldest off to college, teaching my middle daughter how to drive, and hopefully selling an investment property I had on the market. These three things happened, and a whole lot more that I didn’t expect.

My family faced several medical challenges in 2023 and we reached our medical out-of-pocket maximum for the first time ever. After over 20-years in the business, I decided to launch my own wealth management firm. My son also made a life decision at the young age of 10 to switch from being a hockey goalie to playing a new position. It was a year of change that required a lot of resilience and fortitude. I recognized the areas that I was taking for granted, and I ended the year with a deep sense of gratitude for life’s good things.

That is the beauty of life – it isn’t stagnant. Change happens; at times outside of our control and other times of our own doing. Sometimes change hurts; it can scare us, paralyze us, intrigue us, challenge us, and motivate us. All change, good or bad, is an opportunity to propel us forward in new directions. Whatever this year brings, I am certain none of us can predict now how it will end. I know there are changes coming that we will wish didn’t happen, and other changes that will bring unexpected joys. With this new year, I wish everyone the opportunity to learn, grow, and develop in new ways.

Recent results

The market ended 2023 in an unexpected way. The quarter before, I wrote about the nearly 10% stock market correction we had just experienced the previous months. The stock market continued its slide lower until November when it rebounded faster and higher than one would typically see after a relatively benign market pullback. According to Morningstar, stocks were up 12.1% in the fourth quarter, the index’s best quarterly performance since late 20201.  This rebound makes me think about a ball my son has that’s called a “space ball”. It is a highly bounceable material that can bounce higher than a typical ball with very little effort. My son can bounce it to the ceiling even on carpet. The market behaved just like this ball – advancing faster and higher than anyone would expect after a fairly small market decline the quarter before.

The end of 2023 saw such an incredible rally that it propelled both the stock and bond markets into a strong year-over-year result. According to Vanguard, stocks surged 15% and bonds 8% in the final two months of 2023 which brought the overall year-to-date returns to nearly 25% in stocks and 5% in bonds.2 Seeing the strong positive results of 2023 did not in itself come as a surprise, given that the prior year we saw declines of nearly 20% in stocks, and 13% in bonds 3. Markets frequently experience a “bounce back” after especially dismal returns. The chart below illustrates the various returns in 2023 as compared to 2022.

What was surprising was how resilient 2023 turned out to be. We started the new year with what Morningstar calls “the most-advertised recession in history”1. Many predictive economic models showed near 100% certainty of a U.S. recession due to interest rate hikes. It is widely known that in the last year and a half, the Fed hiked interest rates at one of the fastest paces in history. According to CNN Business, the last time the Fed hiked rates that quickly was 40 years ago: in 1980 the Fed hiked rates so high that it plunged the economy into the deepest recession since the Great Depression4. The last 9 rate hike cycles to combat inflation resulted in recessions 8 times, and this current rate hike cycle still on watch5.

As the chart below shows, real U.S. GDP (the measure of economic growth), increased dramatically in the third quarter, seemingly reversing course after trending downward the previous quarters. Fourth quarter GDP numbers are not yet available, but the expectation is growth between 2-3%.

The economy didn’t sink into a recession as widely anticipated in 2023.

The surge in the stock market is explained by the stronger economy, low unemployment figures, declining inflation and the Fed’s announcement of holding rates steady with an expectation of rate cuts in 2024. Many stocks that were held back earlier in 2023 due to fears of high borrowing costs and a recession advanced strongly in late 2023. This was a welcome relief to see a broader stock market recovery given that during the first part of the year, nearly all the market’s gains came from the 7 largest stocks. Investors coined a new term for these seven stocks: “The Magnificent Seven” comprised of Nvidia, Tesla, Meta (formerly Facebook), Apple, Amazon, Microsoft and Alphabet (Google). According to Morningstar, by the end of 2023 this small group of stocks was still responsible for 47.8% of the U.S. stock market’s gain1.

Source: Morningstar Direct

As the chart above illustrates, the “Magnificent 7” had a strong 2023. It’s not unusual for investments to reverse course after short periods. We saw what worked well in 2022 such as dividend stocks, energy stocks and utilities left in the dust as compared to 2022’s laggards such as the tech and communication services stocks that rallied so well in 2023.

Strategies for this market environment

No one knows what will happen next. The big question on everyone’s mind is whether the recession is still yet to come. As Doug Holtz-Eakin, former director of the Congressional Budget Office said, “All hard landings begin as a soft landing - never forget that. There’s been a lot of good news, and everyone should be happy about it, but I would not declare victory too soon.”

As I wrote about last quarter, market downturns present buying opportunities. We like to invest when we see depressed prices. On the flip side, strong markets present selling opportunities. If left unchecked, our portfolios would grow more and more risky as stocks advance, making us most vulnerable when the market is potentially poised for a cooling off period. Instead, we rebalance portfolios to trim back from the areas that grew beyond our desired target and invest across investments that may have stronger days ahead. Rebalancing is a simple strategy to keep us focused on over-weighting investments that are undervalued and under-weighting investments that are overvalued – over time leading us to buy low and sell high.

Words of wisdom

I’d like to close out this investment outlook by paying a tribute to Charlie Munger, who passed away in late November 2023. Charlie was second in command to Berkshire Hathaway’s Chairman and CEO Warren Buffett. He would have turned age 100 on New Year’s Day.

My favorite quote from Charlie is short and yet rich in wisdom.

“The big money is not in the buying and the selling, but in the waiting.”

– Charlie Munger, 1924–2023

Remember that investing is a journey, not a sprint. Stay patient, stay diversified, and stay invested, and you'll be on your way to achieving your financial goals.

My Best,

  

Anne M. Ward, CFP®, MPAS©, AIF®, CRPC™

Founder & Principal Wealth Manager

 

Resources

1 Lauricella, T. & Solberg, L. (2024, January 2). 15 Charts on the surprise ‘everything rally’ for 2023: The stock and bond markets turned in an unexpected banner year. https://www.morningstar.com/markets/15-charts-surprise-everything-rally-2023

2 Kinniry, F.M., Dinucci, T. & Tidmore, C. (2023, December 29). From downturn to upswing: Strong fourth-quarter returns in stocks and bonds. https://advisors.vanguard.com/insights/article/from-downturn-to-upswing-strong-fourth-quarter-returns-in-stocks-and-bonds

3 J.P. Morgan Wealth Management. (2023, December 15). 2023 in review: Rates, rallies and reflections.https://www.jpmorgan.com/insights/outlook/market-outlook/2023-in-review-rates-rallies-and-reflections#:~:text=For%20U.S.%20Equities%2C%20the%202022,2023%20YTD%20return%20is%2014.0%25.

4 Buchwald, E. & Goldman, D. (2023, December 19). America may have done the Impossible: Avoid a recession. https://www.cnn.com/2023/12/19/economy/economy-fed-recession/index.html

5 Siegel, R. & Stein, J. (2023, December 20). Everyone expected a recession. The Fed and White House found a way out. https://www.washingtonpost.com/business/2023/12/18/recession-economy-inflation/

 

The views expressed within this newsletter are subject to change at any time without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security or strategy. This commentary is provided for informational and educational purposes only. Information obtained from third party resources are believed to be reliable but not guaranteed. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.