Optimism, Risk Management, & the New Year

The final quarter of 2023 saw financial markets display the same resilience shown all year long.? U.S. stocks posted their best quarterly performance since the fourth quarter of 2020.? Following a highly turbulent 2022, the S&P 500 defied naysayers all year long and edged closer to a record high.? That was no small feat considering the litany of negative events and headlines throughout 2023.? To name a few, there was the ongoing Ukraine-Russia war, four interest rate hikes (with the Fed funds rate hitting its highest level in over 20 years), a regional banking crisis, the steepest yield curve inversion in over 40 years, a government debt ceiling showdown, and the tragic Israel-Hamas conflict.? Despite it all, stocks powered higher and registered one of their better years in recent history.

You might recall that in 2022, the S&P 500 experienced its fourth worst performance since 1950 and the worst since 2008’s Global Financial Crisis.? Negativity was in the air coming into 2023.? The outlook from most market prognosticators was subdued, if not downright gloomy.? Many prominent Wall Street firms were calling for a recession.? Price targets on the S&P 500 were muted.

In the end, the S&P 500 closed 2023 at 4,770 after beginning the year at 3,840.? Crystal balls everywhere were shattered.?

Contrast Wall Street’s pessimism with what we said at the beginning of last year:

“As for stocks, they are now much more attractively valued than where they began in 2022.? The forward price-to-earnings ratio for the S&P 500 currently hovers around its 25-year average of approximately 17.? That is down notably from nearly 22 at the beginning of last year, which was the highest level going back to the dotcom bubble.? While stocks aren’t necessarily cheap right now, there is no question the outlook for longer-term returns is meaningfully better than it was a year ago.”

While we did mention the possibility of a recession, we also noted the following:

“So, why might stock investors feel more confident now?? A recession – which we very well may already be in – is not necessarily a concern from a stock market perspective.? For one, a case could be made that an economic downturn is already “priced-in” to stocks.? Secondly, and much more importantly for longer-term investors, stocks tend to do quite well following recessionary periods.”

The point in all of this is not to take a victory lap.? Instead, we believe it offers a good opportunity to highlight several of our firm’s core beliefs:? providing globally diversified portfolios, taking a longer-term investment approach, staying disciplined within that approach, and maintaining a level of optimism along the way.? After a challenging 2022, it would have been easy to hop on Wall Street’s negativity bandwagon and change course.? As mentioned above, there were plenty of events during the year that could have served to only reinforce that narrative.? However, abruptly changing course based on “noise” is simply not how we operate.? While we will always place the utmost importance on risk management, we will never let negativity or shorter-term concerns cloud our judgment.? Instead, optimism and opportunity will guide the way.

A Brief Note on Bonds

As might be expected given the bearish overall outlook on stocks, Wall Street wasn’t nearly as negative on the bond market coming into 2023.? The only problem was a number of investors thought interest rates might meaningfully decline and, as a result, they took on significant duration risk (interest rates and bond prices move in opposite directions).? That ended up being a poor bet for the majority of last year.

Our refrain at the beginning of 2023 was “there is now income in fixed income”.? Throughout the year, we continually reemphasized the fact that there are now meaningful opportunities to generate reliable portfolio yield… with two caveats.? We highlighted the importance of maintaining shorter duration and higher quality.? We view bonds as a ballast in a portfolio and our relatively conservative positioning proved prudent overall in terms of managing volatility, while still pursuing income.

Once again, the point of this isn’t to take a victory lap.? Instead, we simply want to highlight the importance of well-constructed, properly diversified portfolios and maintaining discipline despite the noise.? It comes down to balancing the pursuit of returns with sound risk management.

New Year, Same Consistent Approach

As we embark on a new year, there is no question additional negative events and headlines will abound.? Will the Federal Reserve effectively balance inflation control with economic growth?? On the note of economic growth, what happens with employment and consumer spending?? The job market is still relatively robust, but consumer spending seemingly reflects a more cautious approach.? What about the geopolitical backdrop?? Will global tensions continue to rise or subside?? And one more important item… it is a Presidential election year.

The bottom line is the path ahead will be lined with opportunities and challenges, just like most years.? However, our core advice will remain consistent: a globally diversified, disciplined, longer-term, and optimistic approach is paramount.? At The ETF Store, we remain committed to providing you with insights and strategies to effectively navigate financial markets.? Our team of financial advisors is fully committed to engaging with you and ensuring your investment approach is tailored to meet your financial goals.? We will keep you informed and remain adaptive, without overreacting to market events, negativity, and volatility.

Wishing you a prosperous and successful 2024!