Market Review

My, what a year! Who would have thought the stock market would have ended up 26%? Me either. 

For the quarter, U.S. stocks returned 12.07% and developed international stocks earned 10.52%. U.S. bonds were up 6.82% and REITs rebounded 15.47% to close out the year up over 10%. 

After all we’ve been through the past 5 years, no asset class has produced a negative return. The long-term wins.

Check out the usual charts below:

The last time I sat down to write a market review we had just wrapped up the 3rd quarter; it wasn’t a good quarter return-wise and we agreed to file it under the “let’s move on” column. But the returns for the past year are going to be filed under the “yeah baby!” column. It’s just how this investing thing works. 

During my fall meetings in 2022, I presented  this chart:

It shows what a portfolio will earn over the course of different time periods scenarios to get back to the market high set in January 2022. 

At the time the market was down 25% and it hurt badly. What I told clients was this: “Look, the market is down. It feels horrible. But do we think this will go on forever? No, eventually the market is going to recover. We don’t know how long, but we know that it will. Knowing that, here’s what our accounts will earn to get back to even. 

As the chart shows, if it takes 5 years for the market to recover, then our account will earn 8% annually. If it takes 4 years, you’ll earn 9.4% annually. 3 years and you’ll have earned 12%.”

This is how markets work. The only way you get great returns is to go through periods where the market is down 25%. It’s the cost of admission. 

The S&P 500 finished 2023 at 4,771, basically getting back to the January 2022 peak.

I’m shouting at you in marquee lights that you did it! Look at what just happened! You earned 17.6% in your stocks annually over the last 2 years! 

The downside of the markets weigh heavily on us; it affects our attitude, our outlook, and the future, so when things go well, it’s important to celebrate. 

 

Economic Review

Instead of the usual chart dump and short commentary, I’d rather offer a few thoughts.

Pessimism abounded throughout the year. Silicon Valley Bank and Bed Bath and Beyond folded and First Republic Bank had to be sold to JP Morgan Chase. We endured the fastest rate hike in 40 years and yield curve inversion. War continued in Ukraine. War broke out in Israel/Gaza. The consensus said a recession wasn’t a question of if, but when during the year it would hit. 

In 2023, the market did the exact opposite.

Now the pendulum has swung in the other direction. Optimism reigns. Many expect the Fed will cut hold and cut rates this year, boosting the economy. 

So what happens next? If you’ve been a diligent reader for the past several years, you’ll know you won’t be getting any solid fool-proof predictions from me. Instead I offer something better. 

In uncertain markets here’s some market principles you can certainly rely on:

• Over the years, economic growth follows earnings growth (as long as companies are making money, our economy will grow; this renders quarterly earnings reports worthless)
• Approach any market forecaster with extreme distrust
• There will never be any conclusive signs that things “now” will be better moving forward (the 2nd Quarter of 2023 was one of the best, but it was filled with worry and anxiety after the banking crisis)
• It’s bad when you’re in a room and everyone agrees on what the right thing is
• We don’t know the reason for why things happen but we come up with reasons anyway
• You have to learn to cope with the market cycles (good and bad will both come to you)

Tax, Legal, & Legislative Updates

Social Security cost of living adjustment (COLA) for 2024 will be 3.2%.