We wanted to share this recap and review what happened in the markets in 2023.
You might recall at the beginning of the year, there was a lot of uncertainty and negativity coming out of a terrible 2022 in the markets. Remember in 2022, both stocks and bonds declined, which is really unusual. Having a year where both stocks and bonds are down doesn’t happen very often. 2022 was also the first year in history that bonds (represented by the Barclays Aggregate Index) were down for two years straight. Many wondered if 2023 would be the third year in a row.
The beginning of 2023 started with a lot of negative outlook, uncertainty, and angst. People were still worried about inflation and the potential for an economic crash or recession. There were also events at the beginning of the year and into the spring that added to this discomfort, such as the US debt level nearing the max limit. People were concerned over Congress’s ability to pass legislation to raise the limit and avoid the US Government defaulting on its debt. And prior to that, there was also the failure of several US banks, starting with Silicon Valley Bank, which had an impact on the banking industry.
In the first half of the year, there was a lot of negative news. At one point, the stock market was down 10% for the year. It was a rough summer too but then by the end of the year, it rebounded and closed out the year with a nice rally.
In December, the Feds indicated they were finished with raising interest rates and may even cut interest rates again in 2024. This helped fuel a big surge at the end of the year which resulted in the end of year returns:
SP500 (US Large Stocks): +26% US Small Company Stocks: +17% US Bonds: +6% International stocks: +16%
Most investors have a diversified portfolio balancing different types of investments. A portfolio of 60% in US stocks and 40% in US Bonds, the return would have been around 18% last year.
So now, let’s look at the outlook for 2024.
Of course, we can never predict anything. Anything can happen. However, one thing that gives us some confidence is that the Feds have indicated they are finished raising interest rates for now. In fact, they may even cut interest again. So let’s talk about how that might impact some things.
First, when interest rates are cut or fall, that is good for the value of bonds. When interest rates go up, bond values go down. That’s exactly what happened the prior two years and even in the beginning of 2023. But when interest rates go down, the opposite happens. Bond values typically rise. So a reduction in interest rates are good for bond values.
For stocks, cutting interest rates is usually also good news for companies. It makes it cheaper for them to borrow and invest back into their company, so that is usually good for stocks. Going back to 1965, whenever the interest rate is cut for the first time, the SP500 has rallied about 15% on average after the first rate cut. One area where the impact can be negative is with cash. Right now, cash yields have become very attractive. A regular bank savings account can yield over 4% now after years of paltry interest rates of less than 1%. So 4% looks great now by comparison. And money market funds can yield over 5%. So it’s very tempting to want to move more money to cash. However, when interest rates get cut again, cash stands to fall- and fast. And when that happens, if an investor decides interest rates are too low and they want to move back to stocks and bonds, by that time the prices will likely have already risen, meaning they will have missed out on that opportunity. So if your objective remains long-term, we recommend sticking with your asset allocation plan and resist the temptation to be lured in by cash right now. Also, the 10-year treasury rate is still below the rate of inflation. Which means even though returns on cash are more attractive than they were before, inflation is still higher and they aren’t keeping up.
For the economy as a whole, we are still looking for a potential “soft landing”, moderate inflation, and solid growth, which would still leave more room for stocks continue to grow.
Of course, we are always aware anything can happen. Expect the unexpected. We continue to monitor what is going on in the markets and economy and will continue to keep you informed as needed.
We also know it’s an election year which always makes things interesting! Be on the lookout for another vlog from us within the next few weeks on that topic. But for now, we wish you all a prosperous 2024!