Fourth Quarter 2023 Review and Outlook

Written by Tim Rigby

The markets enjoyed a strong final quarter of the year.  According to The Wall Street Journal, the indexes posted returns as follows:

 			                                                                             Quarter		    Year

The Dow Jones Average 12.48% 13.70%

The S&P 500 11.24% 24.20%

The NASDAQ Composite 13.56% 43.40%

2023 was an unusual year for stocks.  If you were heavily concentrated in the large tech companies, “The Magnificent Seven” (M7) you enjoyed exceptionally strong returns.  If you owned almost anything else (outside of outliers such as Belfuse), the returns varied from modest to slight decline, despite the rally.

We can glean lessons from the “Nifty 50” in the 1970s.  If you are unfamiliar, the “Nifty 50” were fifty stocks serving as the basis for the bull market of the early 1970s.  As the decade wore on, prices of the stocks rose more quickly than the company earnings and investors began to ignore fundamental stock market valuations and invested instead on popular sentiment.  While some of the original Nifty 50 have recovered, their crash in the 1980s serves as a lesson to what can happen when fundamentals are ignored.

The M7 serves as an even more concentrated version of this phenomenon – while the Nifty 50 were all considered “blue chip stocks” and spread across sectors, the M7 are all in the technology sector.  If your portfolio was heavily allocated to the M7, you would have seen a rise in your portfolio value last year but would be taking on immense risk.  The two lessons we can take away from this are:  1) market fundamentals should always be taken into consideration and 2) diversification across sectors lessens risk.

In the bond market, interest rates jumped sharply early in the year as the Federal Reserve Bank raised short-term interest rates dramatically to fight a surge in inflation.  This caused a decline in bond prices, as we noted in previous newsletters.  By midyear, inflation began to moderate which allowed the Fed to “pause” its aggressive interest rate hike campaign.  The markets are now anticipating the Fed will start lowering rates sometime in 2024 so bonds have improved, which excited investors and caused the rally.

Our thought is interest rates should stay in a relatively narrow range for the foreseeable future.  At some point, the world must revert to a normal yield curve where an investor can earn a return over and above the rate of inflation.  Interest rate cycles historically are very long so rates most likely will continue to slowly increase over time from their bottom 2 years ago.  A normal yield curve would be good news for the economy as well as stocks and bonds.  Many economists had predicted a recession was inevitable, but it hasn’t happened.  The economy has enjoyed modest growth coupled with a very strong jobs sector, so a recession doesn’t appear to be on the horizon and yields should normalize over the next few years.

Have a healthy and prosperous 2024!

Tim Rigby