Heartfelt greetings from Integrity. We hope you are doing well and staying warm during the ongoing cold spell in many parts of the country. As we enjoy winter activities, let’s take a moment to reflect on the incredible journey of the past year and gaze ahead to the promise of warmer, sunnier days.
The year 2023 unfolded as a spectacular chapter for the investment markets, leaving an indelible mark on the financial landscape. The S&P 500, Dow, and Nasdaq demonstrated exceptional resilience, delivering total returns of 26.3%, 16.2%, and 44.7%, respectively. It’s a noteworthy triumph as the S&P completes a full circle, resting just a fraction below the all-time high from precisely two years ago. The U.S. 10-Year Treasury yield embarked on a notable journey, reaching 5% in October before gracefully settling around 3.9% by year-end, contributing to the rise in bond prices. International stocks joined the rally, with developed markets returning 18.9% and emerging markets posting a commendable 10.3%. The rebound was truly a testament to the market’s resilience, defying expectations after the challenges of 2022.
A message that we like to share frequently with our clients and all others around us is that no one can consistently get market forecasts right. No one. According to Morningstar, the forecasts for the 2023 price return of the S&P 500 index from 23 analysts at leading investment firms ranged from 3,650 (down 5%) to as high as 4,750 (up 24%). The average was 4,080 (up 6%). The index ended the year at 4,770. Everyone was wrong by underestimating. We appreciate a quote from Warren Buffett:
“We have long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
The profound lesson of 2023 resonates – news headlines and economic events don’t always dictate the movements of stock and bond markets in predictable ways. Last year’s positive returns occurred despite historic challenges including the worst banking crisis since 2008 (is my cash safe?), rapid Fed rate hikes (will I ever borrow again/how high will loan rates go?), debt ceilings and budget battles in Washington (where is the common sense?), the ongoing war in Ukraine and the conflict in the Middle East (a painful situation), cracks in China’s economy (difficult to get to the truth), and many more. If you had shared these headlines with an investor at the start of 2023, they would probably have assumed there would be a worsening bear market or a deep recession. Contrary to those expectations, we experienced a stellar year in stock and bond market returns. In the spirit of the article’s title and the collective sentiment –
How did that happen?
To distill the complexities, the driving force behind recent market trends has been inflation. High inflation has far-reaching impacts on the markets and the economy, influencing the Fed’s interest rate decisions, corporate profits, consumer spending, and bond returns. While 2022 grappled with these effects, many reversed in 2023 as inflation rates improved.
Consider the Consumer Price Index, which surged 9.1% in June 2022 on a year-over-year basis but moderated to a more manageable 3.1% in November 2023. While this doesn’t imply a return to pre-pandemic price levels, it signifies a deceleration in the rate of increase. For markets, the crucial factor is the slowing rate of change, with core inflation gradually approaching the Fed’s 2% long-run target.
Surprisingly, the anticipated recession from a year ago failed to materialize. While many still expect economic growth to slow this year, there’s a possibility of the Fed achieving a “soft landing,” stabilizing inflation without triggering a recession. This could lead to potential rate cuts by the middle of the year, as suggested by both market and Fed forecasts. Of course, much is still uncertain and investors should always expect the unexpected when it comes to market, economic, and geopolitical events. After all, markets never move up in a straight line and even the best years experience several short-term pullbacks.
Peering into the horizon of 2024, several key insights into the current market environment deserve our attention:
- Exceptional 2023 Returns For Multiple Asset Classes
Stocks rebounded, bonds showcased resilience, and technology stocks, especially in artificial intelligence, played a pivotal role in driving market returns. ~5% returns on cash were a welcomed experience as well.
For 2024 stock returns, there are signs that earnings growth is recovering. Earnings-per-share for the S&P 500 are expected to have been flat in 2023, but Wall Street consensus estimates suggest that they could grow by double digits each of the next two years. While this will depend on the path of economic growth, any increase in earnings will help to improve valuations and support the stock market.
2. Bond Rebound
Following a challenging 2022, bonds had a much better year with interest rates rising through October then falling on positive inflation data. Across the various sectors – high yield, investment grade, and government bonds – we were reminded that bonds can still be an important part of a diversified portfolio.
3. Expected Fed Rate Cuts
With improving inflation and a robust job market, expectations are high for the Fed to cut rates in 2024. The Fed’s own projections suggest they could lower rates by 75 basis points by the end of the year, offering support to financial markets and the economy.
4. Robust Economic Strength
The economy has surpassed expectations over the past year, with GDP growing by 4.9% in the third quarter (one of the fastest rates in recent years). Consumer spending and a business investment rebound offered support. Additionally, the labor market is still far stronger than economic theory would have predicted.
5. Stay Invested and Diversified
While the past twelve months have been positive for investment portfolios, investors should not become complacent. Volatility in the stock market is both normal and expected, with even the best years experiencing short-term swings as shown in the chart above. Rather than trying to predict exactly when these pullbacks will occur (and trying to execute market-timing trades to take advantage), it’s more important for investors to maintain diversified portfolios, with an appropriate level of risk, that can withstand unforeseen events.
All of us have financial destinations in mind. How do we get there? Financial planning is crucial. Strategies around investments are important which is why we provide quarterly commentary on recent market performance like what has been provided above. However, we don’t want anyone to miss the fact that issues such as estate, tax, insurance, charitable giving, retirement income, etc. can be just as important, maybe even more so. Please be sure to work with a team of advisors that can provide not only investment advice, but counsel and credentials around these other important items as well.
For all of you reading this, please let us know what questions you have. We are here to help. We are grateful every day for those of you who are our clients. You allow us to make a living doing something we love for people we deeply care about. To those of you who are not clients, please reach out if you have an interest in connecting.
The Team at Integrity Wealth Advisors