2023 provided an interesting and diverse set of investment and economic themes. Many investors and commentators zeroed-in on the tremendous performance of the U.S. large-cap stock market, which rose about 24% (S&P 500 Index). But that’s fairly misleading in that, without the performance of seven (7) tech-oriented, mega-cap stocks, dubbed “The “Magnificent 7” (Apple, Amazon, Google, Microsoft, Nvidia, Tesla & Facebook), the remaining 493 stocks of the S&P 500 returned just 6%. (The “Magnificent 7” returned 77%!)
Therefore, we prefer to focus on broader themes that impacted markets, the economy and your financial lives in 2023, while also looking ahead to 2024 and beyond.
Inflation: The escalation of prices dropped significantly in 2023, from 6.5% to about 3%. But that doesn’t mean prices are declining; they’re just increasing at a slower rate. Thus, the Fed continues battling inflation via the Fed Funds Rate, which is still 5.25%, while aiming for a target inflation rate of 2%. The core commodity price that did drop was energy – gas prices fell from about $3.25 to $2.80 (-14%) in 2023, but remember, they were $4.60 in mid-2022 (-40%).
Interest Rates: The silver lining in portfolio management for the past 2 years has been increasing interest rates. While declining bond prices in 2022 were painful, investors now earn enhanced yields in their bond portfolios. In October 2023, we lengthened bond maturities when yields peaked. Our MM Fund still yields over 5.6% and longer corporate bonds now yield 4-5%. But we believe bonds will appreciate as rates decline and we locked in those higher yields with longer maturities.
Housing: This is perhaps the most interesting, and arguably, the largest sector of the U.S. economy. Mortgage rates rose to about 7.5%, which caused millions of homeowners to either enjoy having “locked-in” their 2.5% loan rate, or they’re feeling “locked-in” their existing home. Many homeowners wanting to move up or to a new job in another community are staying put because they can’t afford to give up their 2.5% mortgage rate. As a result, the inventory of homes available for sale is limited. So, prices of homes that are selling are inflated, and often purchased by cash-rich buyers who don’t need a mortgage. This dichotomy should eventually balance out with both rates and house prices declining, but we don’t know if that will be in 2024.
Recession: The U.S. Economy is still facing the possibility of a recession, but it’s projected to be fairly mild. With tight labor markets, increasing unemployment may be modest or even unlikely. In addition, economic output is still lagging from Pandemic supply-chain disruptions. So, GDP declines, while possible, should be modest.
Other Economic Influences – All Highly Difficult to Assess and Forecast:
TTC’s Investment Process: We remain committed to our Investment Process and the tools we apply to carry out that process. The primary strategy is ensuring clients have Asset Allocations that are aligned with their:
Equity Allocations during 2023 were shifted slightly from Value ETFs & Funds, which had outperformed in 2022, toward Growth ETFs & Funds. But our Managed Portfolios still lagged the Russell 1000 and 3000 indices due to our broader allocations in Small & Mid-Cap Funds and more modest commitments to Growth and Tech-Oriented Funds. However, we still believe this is the prudent approach given the expensive P/E valuations for many large-cap growth stocks. We have also maintained our allocations to Foreign Equity ETFs & Funds, which again lagged the U.S. markets.
Fixed Income (Bond) Allocations, as described earlier, have no Short-Term Bond allocations and longer bond maturities, which locked in those higher yields. As a result, our core Vanguard Total Bond Market ETF returned over 18%. We also added to our High Yield and Emerging Markets bond allocations in 2023, which returned over 11% and 13%, respectively.
Cash (Money Market Funds) Allocations were reduced slightly. Some of that re-allocation was used to purchase U.S. Treasury Target Term ETFs, which mature in 2026 and 2028. But with a MM rate of 5.6%, it’s tempting to maintain over-allocations in Cash; however, we believe allocating to longer bonds will be more rewarding over the long term.
Active v. Passive Strategies. Over the years, the performance of these two approaches tends to rotate. 2023 offered both, but they were very close! Active Bond Management enhanced portfolio performance, so Active portfolios with larger bond allocations outperformed Passive bond portfolios. Conversely, Passive Equity Management outperformed Active equity portfolios, so Passive portfolios with larger equity allocations outperformed Active portfolios.
Rebalancing will continue to be one of our most effective tools to readjust portfolios, causing us to reduce allocations of outperforming sectors and adding to allocations of underperforming sectors.
Final Thoughts Remember, it is fruitless to attempt to time the markets. To do so successfully you have to be right twice, once getting in, and again, getting out. Almost no one gets both right with any consistency. Since markets tend to rise over long periods, stay invested based on your risk capacity and risk tolerance and let the power of compounding work its magic.
Our advisors are passionate about helping people achieve financial peace of mind. Contact us today to get the conversation started.
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