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Hi All-
Happy fall! Hard to believe the holidays are already right around the corner.
In this distribution, we are sharing our 3rd quarter market review for 2023, as well as thoughts for final quarter/end of 2023, and into 2024, in an effort to keep you informed and updated.
We know that major current events and headlines have short-term impacts on financial markets, we make sure to address them in our ongoing content, but in any case, as a reminder:
· We are long-term, goal-focused, plan-driven equity and fixed-income investors. We believe that lifetime investment success comes from acting continuously on our plan. Likewise, we believe substandard returns, and even lifetime investment failure, come from reacting to current events.
· The unforeseen and indeed unforeseeable economic, market, political and geopolitical chaos of the three years since the onset of the pandemic demonstrates conclusively that the economy can never be consistently forecast, nor the market consistently timed.
· Therefore, we believe that the most reliable way to capture the full return of equities is to ride out their frequent but historically always temporary declines.
· When we select investments on your behalf, we are not speculating. We are buying a large number of well-diversified, high-quality, profitable companies with strong balance sheets & durable competitive advantages.
These will continue to be the bedrock convictions that inform our investment policy, as we pursue your most important financial goals together.
By the end of this week, you will also receive YTD performance reports via encrypted email. These will be supported by some simplified guidelines on how to read and interpret them (i.e., where to find your personal return & the return for the various benchmark indices). In addition, I’ll provide a very quick, easily digestible 1-2 sentence take on what we see ‘going on’ with each major asset class (US Large cap growth, US Large cap value, US Mid & Small caps, International, Bonds/Fixed income) to help provide a better understanding of our ‘big picture’ rationale behind how we’re weighting portfolios, regardless of whether the asset class is adding to, or detracting from performance within 2023.
While the S&P 500 index is up in 2023, a true ‘recovery’ from 2022’s short-term ‘hit’ (as a reminder, we don’t use the word ‘loss’, as you only ever realize a ‘loss’ if you sell in these moments) has been elusive. It’s been another rocky year for the market. Right now, it’s only really the ‘Magnificent 7’ stocks (Microsoft, Apple, Alphabet, Amazon, Tesla, Meta, Nvidia) that are holding up the index’s positive return for 2023. Otherwise, when you look at the other 493 stocks that make up the S&P 500, the market is flat for the year. So far, this is the most narrow start to a recovery that we’ve seen in decades. This summer, it was obvious that inflation was falling in a meaningful and sustained way, and there seemed to be increasing confidence that the Fed would pause rate hikes and maybe even start ratcheting down by early 2024. As a result, we did temporarily see a bigger ‘bump’ in the market with many more stocks making gains. However, since then, we have had to temporarily give back some of those returns, as the Fed continues to remain ‘hawkish’, indicating that rates will likely remain higher, for longer.
The lack of clarity on how long these high rates will continue in turn causes concern that the Fed could overshoot it’s target and push us into a recession (the Fed is trying to deliberately slow our economy down to control inflation). All this being said, despite high interest rates the US economy remains incredibly resilient and we do believe in our base case that the Fed will be able to ‘pump the brakes’ before we fall into a contraction/recession. And even if we did, it would likely be a very short and shallow one.
The main point here is that the vast majority of stocks (especially large cap value stocks, mid caps, small caps, international) are still either flat or even negative for the year, and they’re not likely to regain a sustained post-2022 recovery footing until we get more clarity on Fed policy/interest rate outlook. However, what the market movement over the course of the year has shown us (it made a bigger, broader run up as there seemed to be more certainty, but then fell back with more short-term uncertainty) is that when (not if) inflation has been controlled to the extent that the Fed turns ‘dovish’, the ‘bounce’ will broaden and we are likely to see big gains across these current ‘laggard’ asset classes and should remain invested in them. And for now, if you’re still in a position to buy, this is where the real bargains are!
Click the link below to view the video, and feel free to use the table of contents to skip to the sections that interest you.
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