Rather watch Ara explain the market commentary in a video? Click here to watch.
As we turn the page to a new year, there are several takeaways from 2023. While it does seem like the worst is behind us, I can assure you 2024 will bring its own challenges. As for 2023, let’s walk through a few of the predominant predictions.
Recession
Trying to accurately predict anything with the economy is hard and nearly impossible in the short term. I have written about this topic, illustrating just how difficult it is to predict market returns. Nearly every Wall Street firm is wrong every year.
The same can be said with predicting recessions. As a reminder, roughly two-thirds of chief economists called for a global recession in 2023. That was an overwhelming majority—and we didn’t even come close!
The Federal Reserve tried their hardest to cool consumer spending and job creation, but it didn’t happen. Consumers were extremely resilient, and corporations had refinanced their debt at record-low rates during the pandemic, which allowed them to keep up with spending and hiring.
While the economy is showing some signs of cooling, it seems like a soft landing is likely.
Death of the 60/40 Portfolio
Given how poorly both stocks and bonds performed in 2022, the drumbeats for the death of the 60/40 portfolio started up again. As a refresher, a 60/40 portfolio is composed of 60% stocks and 40% bonds and is meant to stabilize a portfolio’s volatility, as both rarely decline in the same year. Unfortunately, 2022 was one of those years, and the 60/40 portfolio lost ~17%, its worst performance since 1937!
Well, as things usually go, the 60/40 rebounded with a vengeance and is up ~17% as of this writing. To be fair, nearly 75% of these gains came in the past seven weeks. While the rebound is remarkable, this is why you stay invested and block out the noise. Those who sold to cash in late October missed one of the best seven-week returns for a 60/40 portfolio.
With inflation cooling, it seems evident that bond volatility is on the decline while providing a high level of income. This is important since stocks are not the only game in town, and bonds can now do some of the heavy lifting.
Interest Rates
Midway through 2023, even I wondered if rates would ever come down! I’m kidding, of course, but there were several scary moments along the way.
Even as inflation was clearly cooling, the Federal Reserve continued to raise rates and signaled a higher-for-longer mantra with the expectation of perhaps one rate cut in 2024. It took them a few months, but they eventually flipped and are now signaling three rate cuts in 2024.
Takeaway here? Don’t take the Federal Reserve’s word as gospel. Their job is extremely challenging and nearly impossible to accurately predict on a quarterly basis. Take their word with a grain of salt.
Cash Is King
I can’t tell you how many articles I read anointing “cash as king” throughout 2022 and early into 2023. Yes, if you had the foresight to sell bonds and move to cash in January of 2022, that trade would have paid off tremendously—but ONLY if you also had the foresight to rotate back into bonds in October of 2023. The truth is, few did and missed one of the best two-month rallies in bond market history!
The question is do you rotate back into bonds now after such a massive run-up? Wait for a sell-off, then rotate? What if a sell-off doesn’t occur in the next few months and bonds keep moving higher?
Decisions like these are hard and stressful, but also avoidable. A better option would be to manage your bond portfolio’s duration, like we do for clients. Sure, your bonds would have still lost in 2022, but far less than the aggregate bond index. And you would have the opportunity to increase duration this year to take advantage. While it wouldn’t be perfect, it doesn’t need to be, as you aren’t abandoning one asset class for another.
Last year ended up being a heck of a year for both stocks and bonds. There were several periods where that seemed unlikely, but volatility goes both ways. Thankfully, markets go up far more often than they go down. The amount of volatility we have all endured over the past three years should have prepared us for just about anything. But here’s to hoping for a “boring” 2024.
Discuss your situation with a fee-only financial advisor.