Hello, and happy new year (we can still say that, right?) What a difference a year can make! This time last year, we were reporting on some of the worst stock and bond performance ever, and this year, it’s quite the opposite story. Despite kicking off 2023 with many challenges and lots of negativity, the markets ended up performing very well.
Here’s a summary of 2023 asset-class returns:
What drove the dramatic rebound? One of the main reasons was inflation finally started to cool, giving the Federal Reserve (Fed) the space to shift from increasing interest rates to anticipated cuts in 2024. Additionally, the widely predicted recession never materialized. So far, the U.S. economy has been incredibly resilient in the face of the Fed’s sharpest and fastest interest rate spike in its 110-year history.
The U.S labor market remains tight with companies continuing to hire, and the unemployment rate sits at a low 3.7%. The U.S. consumer has weathered the higher-rate environment very well. That has a lot to do with the fact that most of consumers’ debt is in lower-rate, longer-term mortgage balances – versus higher-rate credit card balances.
Some of the classic indicators that we use to gauge the probability of a recession (namely the yield curve and ISM manufacturing index) have improved. A year ago, they were flashing warning signs, leading many (including us) to predict the economy was heading for a recession. While a recession is still possible, we believe it will likely be mild and short. The yield cure is still inverted (short-term bonds are paying more than long-term bonds) and the ISM is still in contraction territory, although it appears to be bottoming.
Where do markets go from here?
Given the positive economic backdrop and the likelihood of rate cuts, the outlook for corporate earnings, a major driver of market performance, is looking pretty good. With that said, we have a presidential election this year which will likely cause increased volatility as the markets don’t like uncertainty, and we expect plenty of that with this election. The good news is that elections tend to have little impact on the economy and the markets over the long-term.
We believe that some of the areas of the markets which have lagged (small and medium-sized companies and more defensive sectors) should benefit from the general strength of the economy. We also see opportunities in bonds as almost every segment of the bond market is currently at multi-decade highs in yields.
This is our friendly reminder that the economy cannot be consistently forecast, nor the markets consistently timed. We believe the most reliable way to capture the full return of stocks and bonds is to ride out their frequent, but historically temporary declines. If your goals haven’t changed, we will recommend that you stick with your plan.
As always, we welcome your questions and comments, and we look forward to talking with you soon. Thank you again for the opportunity to be of service. It is a privilege for us to do so.
Take good care,
Anne & Atricia, your “A-Team”