Last Year’s Headlines
This time last year, we wrote about a number of topics that were top of mind for investors heading into 2023: the Russia-Ukraine conflict; concerns about China’s growth and geopolitical tensions; inflation; elections; the Federal Reserve’s interest rate hiking campaign; the timing of a recession (remember the hard landing vs. soft landing debate in the media?); and volatility within equities and bonds, to name a few. Looking back, we can perhaps cross one item off the list: it seems the Federal Reserve is done raising rates, although we believe the impact from higher rates may still have a lingering, ripple effect on economic data.
By Robert Papelian, CFA®, CMT, CFP® – Chief Investment Officer & Daniel Yu, CFA®, CFP®, AIF® – Economic Strategist
Last year brought a few more headlines, as well: regional banking issues with Silicon Valley Bank, Signature Bank, and others; the artificial intelligence craze in the equity markets; the US government suspending the debt ceiling; Fitch downgrading the US government credit rating; oil prices spiking again, with gold at all-time highs; and heightened tensions in the Middle East with the start of the Israel-Hamas conflict.
Last Year’s Markets
Amidst the noise, the broad US equity markets returned nearly 26%; the US aggregate bond market returned 5.5%; and global equity markets ex-US returned over 16%. We believe this is a testament to the capital markets’ ability to digest and discount news and events quite rapidly and hold a long-term perspective.
In the short run, we know that market prices can appear to react emotionally at times by seeming to overreact to events. But we also know the market attempts to look beyond the present and answer such questions as, “Is this an event that will permanently impact the ability of companies to earn higher profits, or is this a short-term phenomenon we’ll largely forget about soon?”
The markets are resilient. We know better than to try to make sudden, reactionary moves with our investment allocation and instead try to rely on long-term economic trends to dictate our actions. We look for value in out-of-favor areas and realize gains when things work—in other words, buy low and sell high—and we have noted that disciplined approaches to rebalancing often add much more value to investment portfolios than trying to chase the latest fads.
Confidence Returning
The US economy largely showed quite a bit of strength, even though higher interest rates make for a more challenging operational environment for companies, all else being equal. During the year, investors found that many companies expected to face harsher conditions with higher rates, but actually received positive surprises in quarterly earnings announcements, and so as time went on, investor confidence returned to risky assets.
After 2022, investors understandably carried concerns into the new year, and the lack of confidence baked into the capital markets set the stage for a rebound year in 2023 in the absence of any confirmation. In other words, as investors began to realize that fears may have been overblown, the lack of very poor economic data was enough to draw participants back into capital markets. However, we do note quite a bit of cash “on the sidelines” still in money markets and savings accounts across the US.
New Initiatives
Throughout 2023, REDW Wealth began and furthered several initiatives to offer new strategies to client portfolios. Our Investment Committee approved a number of private or alternative investments for use by investors which meet the respective suitability requirements of the products, and we expanded our approved investment list with a number of products we have confidence in as a result of our due diligence efforts. We also explored new technologies to alleviate the burden of paperwork that some investment products require, and we approved and implemented the use of separately managed accounts (SMAs) to better tailor portfolios to clients’ unique circumstances.
Beyond the portfolio, we made several internal changes we believe will allow us to continue finding ways to deliver more value to clients. We have made improvements to our client portal and our financial planning capabilities, and we have broadened the tax team within the Wealth Management department to increase our ability to perform projections and tax planning.
Looking ahead, we will continue to explore additional ways to streamline our processes and enhance our service offerings. In an industry of changing regulations, and in keeping with our desire to always improve upon the client experience, we regularly review new technologies and opportunities with the aim of doing more for our clients. We are excited about putting some of these ideas and changes into action in the year ahead.
What to Expect in 2024
With respect to the markets and economy, we still believe there is a meaningful chance of a recession. However, the odds of a soft landing—a continued decline in the rate of inflation without a recession—have certainly improved. The balancing act for the Federal Reserve will be to hold rates high enough to bring down inflation, while still allowing for general economic growth.
At present, the main source of inflation is in housing/shelter, which we need to see decline without pushing the broader economy into recession. We are also seeing broad-based contraction in manufacturing, with services weakening, though still expanding. At the time of this writing, the headline Consumer Price Index ticked up slightly while the core (less the volatile food and energy sectors) Consumer Price Index remained level, demonstrating that the road to lower inflation is likely to be a bumpy one. We do expect the housing market to be largely resilient this year after a bit of a lull in activity in light of rising mortgage rates.
In the absence of a sharply worsening economy, corporate profits should be resilient. The market is pricing in multiple rate cuts this year, but more importantly, the Fed has acknowledged risks that it did not touch upon in much detail around this time last year and instead has indicated willingness to be flexible with its policy. A couple of the primary risks, as we see it now, are events that can drive inflation higher, like increased geopolitical tensions. In the absence of any negative catalysts, there’s no reason not to expect the equity markets to push higher this year.
We do, however, recognize that the markets seem to be priced with quite a bit of confidence to begin the year, and we do expect some sensitivity to negative economic news. So, we are prepared and will not be surprised to see more bouts of volatility this year.
Last year, we mentioned that we do not expect a rising tide to lift all boats to the same degree as in 2023. We noted the broad US equity markets returned north of 26% in 2023, but consider that large caps were responsible for much of that increase, with a return on the S&P 500 over 26%, with growth-oriented companies returning over 30%, value-oriented companies returning about 22%, and smaller companies returning 17%.
Within bonds, we saw the yield curve (a plot of interest rates by bond maturity) change quite a bit during the course of 2023, but the yield curve ended the year largely unchanged from point A to point B. We took advantage of some of these disconnections in the capital markets to make some tactical adjustments to our investment profile, as your relationship manager has likely discussed with you.
The different valuations within equities and the changing landscape in bonds presents us with opportunities to continue to be more tactical with what we are buying and selling without trying to worry about timing the market in the short-term. We expect the capital markets in 2024 to allow for similar opportunities to search for value, but perhaps with a bit less volatility in the absence of an economic deterioration or unexpected government regulatory or policy changes—and since it is an election year, we can certainly expect more headlines and potential volatility to creep into the capital markets as we all try to update probabilities and projections in real time.
Looking Forward
We look forward to continuing to work with you in this new year and enhancing your experiences with our team. As we will undoubtedly experience volatility at some point this year, and as the news and media outlets continue to focus more on the negatives, it will behoove us to think about 2023 and the stark difference between the multitude of concerns for the economy and the returns of the capital markets. We will continue to invest with steady heads and greatly value your trust and partnership.
© 2024 REDW Wealth LLC. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. Information and instruction shared in the article above do not guarantee outcomes, performance, or quality of services provided to REDW Wealth Management clients by REDW Wealth Management or its employees. Adherence to our fiduciary duty is not a guarantee of client satisfaction or any particular outcome. Advisory, Assurance, and Tax is offered through REDW LLC. Wealth Management is offered through REDW Wealth LLC.
