DSWM Quarterly: Q4 2023

There are people who like surprise parties and there are those that really do not, it is a different story when it comes to market surprises as it is nearly unanimous that investors do not like surprises. Market surprises are not akin to a surprise birthday party, a market surprise creates uncertainty of what negative effects the surprise might have on their portfolio. Looking back at 2023 there was certainly surprises but this time, they were nice surprises. Nearly all investors were anticipating a recession during the year, but this was one of two welcomed surprises as the recession never materialized. The second surprise for 2023 was strong bond returns and double-digit equity returns. 

That is not to say that 2023 was without its hurdles, but in each instance the market proved resilient, despite that for most of the year, there was an unrelenting consensus that a recession was right around the corner. The biggest story from 2022 carried into 2023, high inflation globally, the global central banks policy responses, and the impact that policy would have on growth. In the U.S., the Federal Reserve would slow down the pace of rate hikes in 2023, pivoting from 75bps hikes to 25bps hikes. There would end up being 4 hikes in 2023 with the last rate hike in July leaving the target range at 5.25%-5.50% where it sits today. The consensus is their strategy to this point has been effective, looking at CPI data, the average inflation rate was nearly cut in half, from an 8.00% average in 2022, to a 4.10% average in 2023.  The pause in rate hikes coupled with increasing optimism from investors for a “soft landing” resulted in a strong year for bonds. During  the 4th quarter we saw the 10yr treasury yield come off its high for the year (which occurred in October) and finish more than 100bps lower (yields down, prices up). The market ecountered the first major consequence of the higher interest rate environment in the first quarter of 2023 with the failure of Silicon Valley Bank. The bank collapsed under the weight of higher interest rates, a concentrated deposit base, and poor interest rate risk management. While the same issues would cause a handful of other banks to fail, the overall strength of the banking system and swift actions by the FDIC prevented the failures from cascading into a systemwide banking crisis. On a positive note, early in 2023 technology companies in the U.S. began making major annoucements of investments in the next generation of artificial intellegence technology.  The anticipation of numerous applications for the advancements in this technology and investors’ eagerness to find companies that would benefit from it, lead to a group of 7 mega cap stocks (coined the “Magnificent 7”, made up of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) becoming the focus of the U.S. equity market for the year. To put into context how focused the markets became on these companies, the S&P 500 finished the year up 24.20%, of that appreciation the  “Magnificent 7” contributed nearly 70% to the S&P gain.

 Outside of the U.S., international markets also delivered a “pleasant surprise” following a dismal 2022 performance. The rest of the world’s developed economies continued to follow the U.S. Federal Reserve’s lead by raising interest rates to combat inflation. Although economic data across many developed economies was somewhat underwhelming, foreign equity and bond investments delivered strong returns. In fact, without the significant contribution to return from the “Magnificent 7” the U.S. equity large cap market would have trailed most international equity markets for 2023. As was the case with the U.S., despite the positive upside surprise for returns in 2023 from international investment, it was not without some negative headlines. The most upsetting of those headlines was the addition of another violent conflict in the world. While the war in Ukraine continues to make grim headlines, the attacks in Israel and subsquent rebutal in Gaza added another devastating conflict. The concern for all of those impacted by these conflicts is first and foremost. Looking at these conflicts from a market standpoint, these wars continue to add geopolicitcal risk if they escalate beyond the borders of the countries currently involved. Shifting to emerging markets, most of the emerging market economies proved resilient despite the looming concern for stalling global growth. However, one weak point was China, the Chinese economy started 2023 on a highpoint as the last of the COVID-19 restrictions were lifted. However, the expected economic surge failed to materialize as the year went on and the Chinese economy toiled with slowing growth coupled with a brewing real estate crisis. 

*Median Strategist Estimate is derived from end of 2023 forecasts from 23 analysts at leading investment firms at the beginning of 2023. Morningstar 1/9/2024

Now we look forward to 2024. As is always the case, it does not matter where you look, it might be an interview on Bloomberg news or an article in the Wallstreet Journal, there is no shortage of confident opinions about where markets are going this year. There is one thing all of these opinions have in common, they are just that, speculative opinions. No one knows what the markets have in store for us  tomorrow, a week from now, and certainly not over the course of the next year. There is value in research as it pertains to long term asset selection and portfolio construction but predicting the exact path of the market is impossible. An example of this is the chart above which shows the beginning of the year analysts’ consensus S&P 500 returns compared to the actual return of the S&P 500, as you can see analysts have missed by double digit percentage points each of the last 6 years. This proves that even for experts, it is impossbile to predict markets. Instead of trying to anticipate the next surprise and its impact on your portfolio, the better approach is building a portfolio that is resilient throughout various market cycles. This is accomplished through proper diversification, consistent rebalancing, and maintaining a long-term approach. You will have better luck predicting your next surprise birthday party than the next market surprise. The big difference is that trying to predict the next market surprise could have lasting impact on your long-term portfolio returns. 

 Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio/financial plan review. Wishing you a healthy and happy New Year!

Droms Strauss Wealth Management

www.droms-strauss.com

(314) 862-9100

For information purposes only. Opinions expressed herein are solely those of Droms Strauss Wealth Management, unless otherwise specifically cited.  Material presented is believed to be from reliable sources, but no representations are made by our firm as to another parties' informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation. Past performance may not be indicative of future results. Indexes are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.