Markets surged to wrap up 2023 with gains across the board. Q4 saw large domestic companies, as measured by the Standard & Poor’s 500, gain 11.2%. The Russell 2000, reflecting smaller domestic firms, was up 13.6%. Coincidentally, the Nasdaq Composite, with a major weighting of technology stocks, was also up 13.6%. Foreign firms, generally speaking, advanced with the Dow Jones World Index (ex US) up 9.3%.
Not surprisingly, the driving force behind this rally was interest rate expectations. Coming into the quarter, most investors anticipated another rate hike before year end. Indeed, that’s what Chairman Powell told us in September, along with a likelihood of rates “higher for longer” in 2024. As it turned out, the Fed cautiously held steady at the October/November meeting. Then came the final meeting of 2023 in December. Not only did the Fed not raise rates, but Powell explained policymakers are “recognizing the downside risks of an overly restrictive stance.” He did make clear that the inflation fight is not over, stating that “while participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table.” But the FOMC member dot plot called for three quarter-point rate cuts in 2024, and investors reacted as if they called for twice that. Positive investor sentiment surged, and with it, the demand for stocks.
So where does that leave us now? It is always helpful, especially after experiencing a major market swing, to pull back and examine the longer time period. At the current level, the stock market is about where it was two years ago. 2023 was basically a rebound from the painful market downdraft of 2022. We are optimistic that Fed actions have tamed the inflation beast, and that a more accommodative economic environment is forthcoming. Perhaps a soft landing will be achieved. Then again, rate hikes take time to ripple through an economy and an uncomfortable recession in 2024 is not entirely out of the question. The fact is we are facing both encouraging and challenging economic and geopolitical circumstances. A skilled debater can make a convincing bull or bear argument either way. In our experience, the long-term investor inhibits the odds of success by managing portfolios based on short-term market prognostication. Rather, the astute long-term investor thoughtfully constructs an appropriate portfolio based on historical return and volatility characteristics of the basic asset classes. Then adhering to one’s personally tailored portfolio, occasionally rebalancing as necessary, is the key to achieving long-term investment success.
Please know that we welcome your calls, emails, texts, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.