New Year Perspective Including: Record December, the Fed's Dual Mandate, Taxes, and Newsworthy Bonds

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Happy New Year, and cheers to a joyful and chaotic holiday season! Heading full-steam into 2024, let’s recap 2023, and set the stage with economic themes for the year ahead. As an independent firm, we have the advantage of seeking multiple perspectives, and performing unbiased research with source data. As always, we work diligently to distill information, to cut through the noise, and provide the foundation required for disciplined investing.

2023 was the financial version of the Rorschach test. Individuals and media outlets were looking at the same information, yet their viewpoints were widely varying. “We’re in a recession… we’re not in a recession… rates are skyrocketing… rates are calming… no one can buy a house… homes are on sale, and so on.” While news sources often cite only the data points which support their angle, the only perspective which really matters is the one in context of your personal headlines and plan.

Altogether, markets closed 2023 on a positive note. There was no recession in 2023; employment remained historically high; the Fed’s rhetoric (its most important tool) shifted to a more neutral stance; and major indices ended in the green. In 2024, we’ll maintain focus on the Fed and its dual mandate, consider the real impact (or not) of geopolitical conflict on the market, and review the impact of elections and tax data, similar to years past.

2023 closed the year with a rally after a downtrodden Q3. Smaller companies led, with the best December in nearly 30 years.

• U.S. Small Cap Stocks (Russell 2000): +14.03% Q4, +16.93% 2023
• U.S. Stocks (Russell 3000): +12.07% Q4, +25.96% 2023
• International Stocks (MSCI EAFE ): +10.47% Q4, +18.85% 2023
• Emerging Market Stocks (MSCI Emerging Index): +7.93% Q4, +10.27% 2023
• U.S. Bonds (Bloomberg Barclays Aggregate Index): +6.82% Q4, +5.53% 2023

Q4 performance broadened, but the newly dubbed Magnificent Seven (Microsoft, Apple, Alphabet, Tesla, Meta, Nvidia, and Amazon) drove outsized performance for the calendar year. This is not an argument to speculate. It’s an argument to diversify well enough to maximize the odds of exposure to the next magnificent seven. Trying to guess the seven “right” stocks, will leave you with thousands of opportunities to choose incorrectly.

What the headlines won’t tell you, but we will: Bond immunization worked during this rising rate cycle. Immunization is a fancy term for keeping your investment term shorter than your investment timeline. It’s what Silicon Valley Bank didn’t do (they held all long-term). Emphasizing shorter term bonds allows you to reinvest interest more quickly at the rates available. Take a look at the three year comparison between long and short maturities.

Inflation is under control, but the fight continues. Headline inflation ended the year at 3.35%. The long run average is 3.28%. The Fed target is 2%. The total money supply is down as well, which historically leads the inflation trendline. Take the 2023 win. However, don’t count your chickens for 2024. There are still challenges, especially on the supply-side, given the conflict in the Red Sea, which may elevate short-term input costs.

The Fed has a dual mandate: control inflation and keep unemployment low. Unemployment is 3.70%, below the post WWII average of 5.70%. Simply stated, if inflation is above target (it is) and employment data is strong (it is), only incremental rate reductions should be expected. Don’t be surprised if the Fed maintains its overnight lending rate at, or near, the current level.

It’s an election year, so providing objective data on variables and historical outcomes will be a priority again. The sunsetting tax bill is an issue causing speculation. As we wrote in 2020, the data around taxes and markets will absolutely shock you. Click here for previous article. The average top level marginal rate since WWII was 59% as of 2020. It’s been above 80% for 24 of 104 years. Taxes will not collapse the economy or market. In fact, if you calculate the S&P 500(r) return only when the top marginal rate was above 90%, the compound annual return would have been 17%!

The constant chess game of geopolitics plays an important role in day to day life, but markets rarely react as expected. Geopolitical events and predictions should not drive investment decisions. For example, international markets beat the U.S. for the 12 months following the Russian invasion of Ukraine, a surprising revelation for investors. We must also acknowledge that the U.S. is, directly or indirectly, involved in some type of conflict more often than not. Add Middle Eastern regions to the mix, then Russia and China, and you won’t find a year without worrisome action. These tensions garner significant news coverage, yet represent the external, uncontrollable threats which are simply an ongoing part of the investment background. Remaining steadfast, proactively planning, and controlling the things that can be controlled represent the best approach for weathering conflict over time.

We wish you and your family the very best in 2024, and look forward to sharing the new year’s adventures. And, as always, please reach out with any updates or changes to your family’s objectives or financial situation, so your plan can be adapted as necessary!

Sources: Ycharts, ATL Fednow, Fred.com

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Index Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI EAFE: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States and Canada. The MSCI EAFE index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.