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Dear Friends,
In the last quarter of 2023, stocks and bonds rebounded in a big way from the market pullback in late September sparked by the prospect of interest rates staying higher for longer. In an overall volatile but successful year in the markets, major indices as of December 15th, 2023 were up as follows:
Dow Jones Industrial: +12.11%
S&P500: +22.8%
NASDAQ: +40.9%
ACWI ex-US (International Stocks): +11.88%
US Aggregate Bonds: +1.95%
It seems like forever we have been saying things will turn around once the economy slows, inflation moderates, and interest rates peak. Yet in Q4 of 2023, we saw evidence that we just might be getting there.
A key contributor to the stock and bond market rebound in the last quarter is the continued progress by the Federal Reserve in combating inflation. Core CPI, a key inflation measure, was flat in October compared to the previous month, and increased 3.2% from a year ago. Both numbers were some of the lowest in the past two years, and provided an encouraging sign that inflation might finally be loosening its grip on the US Economy. The weaker job creation numbers in Q4 – which by itself is not a positive indicator – is also a signal that the Fed’s tighter monetary policy is working to cool the economy as private sector job creation came in at or below Wall Street expectations for October and November.
In the last quarter, we also saw multiple Federal Reserve meetings with no interest rate hikes and a less hawkish tone. In December, Fed Chairman Jerome Powell even indicated that up to three rate cuts starting in 2024 are a possibility, demonstrating that the Federal Reserve is content with the progress they are seeing on inflation and unlikely to hike rates again in the near future. The yield curve, while inverted for the past few months, has also reduced its slope noticeably with the Fed’s balance sheet reductions. An inverted yield curve has long been known as a classic indicator of a potential recession, so this move toward normalization is also encouraging for investors. If we have reached peak interest rates and we are able to sustain low but steady economic growth while decreasing inflation from here, the prospect of a “soft landing” and avoiding a true recession next year does seem like a much more likely scenario than it did earlier this year.
Given the positive market environment to wrap up the year, our investment committee voted to not make any significant changes to our current portfolio strategy while focusing on tax loss harvesting opportunities in our taxable investment portfolios. Tax loss harvesting is the process of selling a position at a loss and replacing it with a similar one, with the idea that while the investment strategy remains undisturbed, clients can use these triggered losses to offset income and capital gains in current and future years. The large pullback in fixed income over the last couple of years has provided many clients with the opportunity to harvest losses which can offset a significant portion of income and capital gains in their portfolios.
While executing on these commitments through year-end, our advisor team is preparing for what is hopefully a more “normal” year for the US Economy and markets with S&P500 growth estimates coming in at 8-12% for 2024 (Argus Market Digest, December 14th, 2023), which is in line with historical averages. We are continuing to stay focused on growth over value in equities and are leaning more into domestic over international investments due to persistent increased risks abroad. In our fixed income portfolios, we continue to stay mid to long duration on bonds to hopefully capture some upside growth if the Federal Reserve does lower interest rates next year, while not going too long duration too quickly in case inflation starts to kick up again and the Fed walks back on its projected cuts, which would negatively affect long term bonds the most. Our advisor team is ready to answer any questions or concerns you may have headed into 2024, and we continue to stay committed to our investment philosophy of maximizing risk-adjusted returns and minimizing risk through diversification, while remaining fee-sensitive.
Through comprehensive financial planning, we partner with our clients to focus on the long-term outcomes, and complemented with a thoughtful forward-looking investment strategy we hope to keep creating success stories for decades to come. We wish all our clients, friends, and families a wonderful, happy, and safe new year. Thank you for the continued opportunity to serve you – both today and in the years to come.
Sincerely,
Ted Smith, Founder & Chairman, RHU, CLU®, ChFC®
Danica Goshert, Senior Vice President, CFP®, CDFA®, AIF®, MBA
Dan LaNasa, Associate Vice President, CFP®
Charles Stewart, Associate Vice President, CFP®
Marcus Schaller, Manager of Financial Planning Services, CFP®, APMA™
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
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