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Charting the Course: 2023 Market and Economic Insights with a Forward Look to 2024

Back in April of 2023, I had the opportunity to speak to a local group of Orlando business owners and retirees with John Kennedy. We were initially asked in January to talk a bit about our company and some timely topics, and by the time April rolled around, the financial markets were in disarray giving us much to discuss. Signature Bank and Silicon Valley Bank were failing, Credit Suisse looked suspect, and First Republic Bank was teetering on the edge of insolvency as well. A few short months later, all four institutions had failed or were neatly tucked into other banks before they could fail. A crisis was averted as this did not spread to the economy as a whole and while we did explain what happened to these banks, we also spent an equal amount of time explaining why these events were not to be feared. Rather, these events can often present different buying opportunities for long term investors, and 2023 ultimately proved us right. 

Looking back, 2023 had no lack of notable negative headlines. Not only were there bank failures, but we marked the second full year of the Russian Invasion of Ukraine, a government debt limit showdown, conflict in the middle east with the Israeli-Hamas war, multiple labor union strikes, and in case you had forgotten- we had high inflation and interest rates to worry about. 2023 was a long year of negative headlines and widespread waiting for a recession to come… except it never did. In fact, by the end of 2023, stock market indices were making new highs or near all-time highs. 

For those waiting on a recession, 2023 was disappointing. The economy actually accelerated in 2023 compared to 2022. GDP grew at a rate of 2.2%, 2.1%, 4.9%, in the first three quarters of 2023 respectively according to the Bureau of Economic Analysis, and the estimate for the fourth quarter is 2.5%. Not to be outdone by economic growth, the unemployment rate remained below 4.0% for the 25th straight month according to JPMorgan. Overall, the US economy was expected to add about 2.7million jobs in 2023. Finally, inflation as measured by CPI is expected to have declined to 3.1%, and while that is higher than the Fed’s 2.0% target, it is much better than the peak of about 9.0% in 2022. 

All of this put together made for a rather good year in the markets. The S&P 500 was up over 26% for the year, while the Dow Jones and the Nasdaq were up over 16% and 40% respectively. Even the bond markets performed with the US Aggregate Bond Index being up about 5% and US High Yield being up over 13%. Unfortunately though, many investors didn’t get to experience these returns. Many investors fell into the “T-bill and chill” trap as they waited for a recession. 

“T-bill and chill” was the name of the strategy for investing in short duration bonds (t-bills) that were earning 4-5% for most of 2023. Investors flocked to this idea in the beginning of 2023 because for the first time in years, returns from bonds were actually available. With the Federal Reserve raising rates to twenty year highs to fight inflation and many investors expecting a recession, earning 4-5% in t-bills sounded enticing. Except, the recession never came. The economy grew, corporate profits stabilized, unemployment remained low, inflation decreased, and the federal reserve began discussing the need to balance their dual mandate. That means the Federal Reserve began to worry about causing a recession just as much as they were worried about inflation, if not more so, and the need for rate cuts became more apparent for 2024. This set off a catalyst near the end of October for a big market rally. By the end of 2023, despite starting off worrying about a recession, the market was at or almost at new all-time highs. 

All of this brings us to two questions: “What will happen in 2024?” and “Is now a good time to invest?” First, what could happen in 2024? Unfortunately, the answer to that question is anything. Entering 2023, most economists felt that the banking system was sound and even if we did have a recession it wouldn’t be likely to cause a financial crisis. Very few people were pointing to a banking issue. Only three months into the year, we had several banks showing stress due to mismanagement. Regardless of economic conditions, the possibility of humans making mistakes is always present and that’s ultimately what led those banks to struggle. Looking out at 2024, we seem to be in a better spot than in the beginning of 2023, but conditions can always change. The best way to view what will happen in 2024 is more realistically answered for the long term investor by the question, “Is now a good time to invest?”. That answer is almost always yes. 

Looking back over the past 20+ years, there has always been a reason to not invest. The dot-com bubble, the war on terror, the Global Financial Crisis, debt downgrades, economic turmoil in Europe, Ebola, Covid-19, Trade Wars, and even inflation were some of the reasons investors could have looked towards the sidelines rather than investing, though history shows us that was not the wise choice. The S&P 500 Total Return index had a value of 2,021.4 on December 31, 1999. On December 29, 2023 the last market day of the year, the index registered a value of 10,327.83. Despite everything that occurred over the past twenty four years, the S&P 500 total return index had an annualized 7% return. While the past is not a guarantee of the future, investors shouldn’t fear what 2024 brings, but rather stick to their financial plan and focus on the steps to achieve their goals that they can control.