Looking Back and Ahead

It’s that time of year again – looking back and ahead

Our 2023 outlook pointed to our concerns about the ripple effect of higher rates on growth in the economy. We were careful to hedge our convictions like any appropriately humble investor should.?

The market did what most said it would not and ripped higher in 2023. Consumer spending and economic activity didn’t decline as we and many others expected, and inflation moderated. Risk assets rejoiced.

It still pays to be conservative

Erring on the conservative side left some gains on the table, but our portfolios still participated in the rally to the extent we would have expected.

While each client portfolio is different, across our core suite of core model portfolios, we took on about 85% of benchmark risk and captured most of the return. In addition to the strong risk-adjusted returns, our positioning provided more downside protection if markets had instead taken a turn for the worse.

It’s sometimes instructive to break apart periods by inflection points or regime changes, instead of by calendar dates. For example, as of October 31st, we were in line with the benchmark year-to-date, having taken on less risk consistently throughout the year.

Then, in the final eight weeks of the year, both stock and bond markets ripped higher on the prospect of imminent and frequent rate cuts by the Fed in 2024. We were positioned with less interest rate sensitivity, which caused us to miss out on some of the gains in the bond market during this period.

We believed the market was getting ahead of itself pricing in six rate cuts in 2024 and remained steadfast in our positioning. And in the world where six rate cuts do materialize, that very well could be one in which the landing won’t be so soft.

What might happen next?

The odds of a soft landing have increased but we continue to explore investments that will work well if an economic slowdown or hard landing occurs. Consumer balance sheets continue to weaken and loan delinquencies are rising. There’s the chance that Fed policy’s “long and variable lags” in how it affects the real economy are taking a little longer to play out.

There’s always a bull case, too.

We currently live in a world where inflation is generally coming down with strong growth. If that dynamic simply continues, there is plenty of liquidity with nearly $6 trillion in money market funds that could be poised to chase further equity upside.

The so-called Magnificent Seven stocks accounted for much of the S&P 500’s returns from January to October. The last two months began a broader-based rally in the markets. Will the Mag 7 become the Lag 7 in 2024? We believe investors are better served by the other 493 stocks in the S&P 500 this year, not to mention a healthy dose of small- and mid-sized companies.

What we’re working on with clients

The beginning of the year has us engaging with our clients in a myriad of ways. One is cash flow planning for the year ahead. We help our clients answer questions like:

• How did we spend money in 2023, and how should we in 2024 in a way that maximizes the use of our resources and reflects our values?
• What big-ticket expenses are on the horizon that we need to prepare for by ensuring ample liquidity, and, if necessary, raising cash tax efficiently from our investment portfolios?
• How can we prioritize paying our future selves first, and find ways to increase income, decrease expenses, or otherwise direct savings toward the most favorable types of accounts and investments?
• Any windfalls on the horizon, perhaps through inheritance or the sale of a business? What’s the plan?

Reach out if we can help point your wealth toward a higher purpose in the new year.