Last month, we discussed some of the hazards that Wall Street analysts may encounter when forecasting market returns. On average, strategists predicted roughly a 2% decline for the S&P 500 Index in 2023, according to Bloomberg.
When those who are given such a task encounter difficulties, we are hesitant to provide any predictions regarding the stock market. When the final returns were tallied, 2023 turned out to be a banner year, surprising nearly everyone, including those in wealth management companies.
Disciplined investors 1, Analysts 0
Strategists came up short, allowing the patient, disciplined, and long-term approach to take top honors.
Why did the market have a strong year? Let’s discuss three factors.
1. As 2023 got underway, the prevalent view on Wall Street and many economists was that a recession was inevitable. Economists have always struggled to pinpoint turning points in an economic cycle. In most cases, recessions sneak up on us.
Last year, we observed the opposite. The loud din of recession calls failed to hit the mark. The miss was probably the biggest economic story of the year, especially for the millions of Americans who would have been thrown out of work.
2. As the rate of inflation began to slow, the Federal Reserve, which had slammed on the monetary brakes in 2022, eased up. In 2022, the Fed raised the fed funds rate by 4.25 percentage points, according to St. Louis Federal Reserve data. It was the fastest pace of rate hikes since 1980.
The pace slowed to one percentage point in 2023, reducing a stiff headwind for stocks.
By December, the Federal Reserve had effectively shifted its stance and is now openly discussing potential interest rate cuts in the coming year. Of course, forecasts can change, but the shift fueled the market’s advance into the end of the year. While the S&P 500 Index ended 2023 just shy of its all-time early 2022 high, the smaller but better-known Dow Jones Industrials eclipsed its all-time high in December.
3. One other variable helped fuel last year’s rise: the emergence of artificial intelligence, which is putting advanced programs into the hands of Main Street. The technology is in its infancy, but the potential is enormous, and cash began pouring into investments that could someday yield big dividends.
Bottom line, the tech-heavy Nasdaq Composite posted a gain of over 40%. The same winners on the Nasdaq also powered gains in the S&P 500 index.
Peering into 2024
Expect surprises. No one can accurately see into the future. As we saw in 2023, expect the unexpected
We believe that having a diversified portfolio is the best way to protect yourself against market volatility and achieve your financial objectives. While it won’t completely shelter you from market pullbacks, it has historically proven to be a strong strategy that can help you reach your financial goals.
Although volatility can be unsettling, it is often temporary, as demonstrated by the failure of Silicon Valley Bank last year and, so far, the ongoing war in the Middle East.
If we were to take a stab at issues on the front burner, we’d start with the economy.
If inflation continues to slow down, it will take pressure off the Federal Reserve, and rate cuts could come sooner rather than later.
Investors are currently betting on the soft-landing scenario. In this scenario, pricing pressure eases while economic growth slows down slightly, avoiding a big hit to corporate profits. This scenario helped drive stocks last year. While the Fed didn’t reduce rates in 2023, the year followed a similar pattern to 1985, 1995, and 2019, when the Fed was able to engineer a soft landing, and stocks performed quite well.
But, if economic growth slows too much, stalls, or a recession ensues, i.e., the hard-landing scenario, any tailwinds from a faster pace of rate cuts might easily be offset by weak corporate profits, as we have seen in the past. Rate cuts in 1974, 1990, 2001, and 2008 failed to prevent a slide in stocks until investors anticipated an economic upturn.
In other words, rate cuts that occur because the Fed “can,” not because they “must,” is the more preferred path, in our view. I trust you have found this review to be informative. If you have any inquiries or wish to discuss any other matters, please don’t hesitate to contact us.
Thank you for choosing us as your financial advisor. We are honored and humbled by your trust.
As we bid farewell to 2023, may the New Year bring you excitement, adventure, and fulfillment. May the year create cherished memories and be filled with joy. Happy New Year!