A Tale of Two Contrasting Stock Market Years

While we are not discussing Charles Dickens’ A Tale of Two Cities, the last two years in the stock markets show a big contrast in their respective performance. As investors, what we have learned over the course of these two years? Today, for our 184th week of our #SundayTimesRecap series, and as it is still close to the start of a fresh new year, let us do a quick review of of the stock market performance for the last two years, with reference to this article published in yesterday’s Sunday Times Invest section, “2023 was great but it’s time for investors to stay prudent”, and learn to invest wisely in year 2024 and beyond:

?

1. 2022 was a terrible year for investors. Recall the simultaneous declines in the stock and bond markets that made 2022 a terrible year for investors. It was arguably even worse than 2008, when the stock market collapsed during the great financial crisis. In 2022, bonds declined sharply in value as interest rates rose, while during the financial crisis, investment-grade bonds rallied as interest rates declined.

?

2. 2023 was a great year for the stock market. However, we must not get carried away. Even after the 2023 gains, most stock investors are only barely above water since the start of 2022. It looks better when you include dividends. Then, the S&P 500 returned 3.42% over the course of the two calendar years. Even so, the small stock market rises have just barely kept up with inflation.

3. The good returns for 2023 came because of a brilliant performance in the last three months of the year, fuelled by growing expectations that the United States economy will avoid a recession, and that the Federal Reserve will soon begin to cut short-term interest rates. The final quarterly and annual numbers for 2023 were exceptionally good. For example, the S&P 500, which tracks the most valuable stocks in the US market, rose 11.2% in the last quarter – and had a total return of 11.7%, including dividends. For the year, it gained 24.2% and returned 26.3%, including dividends. They translate into substantial annual gains for millions of investors who hold stocks and bonds indirectly, through unit trusts and exchange-traded funds.

?

4. What can we learn? Lately, the markets have been much kinder to investors, with both stocks and bonds holding their own. If you have held broadly diversified investments that track the markets, endured the bad times of 2022 and persevered through 2023, you are probably doing okay. You may even be slightly ahead of where your portfolio stood at the start of 2022. Note that the average fund substantially lagged behind the broad stock market averages. Most funds are actively managed by professionals trying to beat the market. By contrast, broad low-cost index funds, which merely seek to mirror the markets, generally did their job well. For example, the Vanguard Total Stock Market Index Fund returned 12.3% for the quarter and 26.1% for the year, beating the average fund as well as the S&P 500.

?

5. What about individual stocks? Some individual stocks did much better than average. Nvidia, which makes advanced computer chips, rose 239% in 2023. Meta, Facebook’s parent company, gained 194%, after falling 64% the previous year on investor scepticism about the company’s focus, back then, on the so-called metaverse. In 2023, however, these big tech stocks benefited from the artificial intelligence frenzy and lifted the S&P 500. Perhaps more surprising, cruise lines surged, too: Royal Caribbean soared 162%, and Carnival rose 130%. If you had focused on any of these stocks at the start of 2023, you would have been a winner.

?

Then again, most stocks underperformed the averages. Dollar General, Moderna and Estee Lauder, all important S&P 500 stocks, lost more than 40% in 2023. Stock picking and market timing are tricky and time-consuming. It may be wise to avoid both practices and seek average market returns, which are better than what most active traders can obtain.

?

6. Enduring bond losses. The picture for bonds improved, too, but with a major caveat. Many people who traded bonds or held bond funds since the start of 2022 haven’t yet recovered their losses. While those who bought and held individual investment-grade bonds in 2022 have done just fine, the performance of bond funds was not nearly good enough to make up for the declines of the previous year. When interest rates rise, as they did in 2022, bond prices fall. Bond fund returns are a combination of income and price changes, and in 2022, the price declines far outweighed the income. Fortunately for investors, that changed in 2023. The Bloomberg US Aggregate Bond index, a widely followed benchmark for investment-grade bonds and core bond funds, returned 5.5% for the year, according to FactSet. But the losses in 2022 were so great that over two years, the Aggregate Bond index was still down 8.2%, and so were many bond funds.

?

7. So, now what? Interest rates, inflation, and the strength of the economy are key factors for both stocks and bonds. It would be good to know in advance how all these things will play out. However, nobody can forecast well enough to rely on these predictions for investing, year in and year out. Fortunately, to prosper as an investor, it is not necessary to know what will happen in the world in the next several months or years. From a longer perspective, what we have been experiencing over the last couple of years looks a lot like mean reversion – the markets pulling themselves back into their customary long-term upward trajectory, after terrible trials. Therefore, expect more of the same: Periodic bouts of market misery, coupled with stretches of gains, giving long-term, low-cost, buy-and-hold investors handsome returns, if they have the strength to hang on during a tumultuous ride. Based on history, including the final tally for 2023, the average annual return for the S&P 500 since 1926 has been 10.4%. That means it has taken less than seven years, on average, for the US stock market to double in value.

?

However, getting those kinds of returns in the future is not a sure thing. They certainly will not be pain-free. Many may have pointed out that decades-long strategy may not work for everyone because the time horizon is short for many people. So in this situation, some may opt for locking in returns at the relatively high interest rates that prevail at the moment, rather than embarking on a long-term “set it and forget it” approach.

?

Whatever your investing horizon, enjoy these better times in the markets, but be prudent. The losses of 2022 provided a vivid reminder of how important it is to set up your portfolio so you can tolerate market agony.

?

My teammates and I are on the same journey to help as many people as we can to gain investment knowledge. Do join our next session, “The Lifetime Income Streams”, this Wednesday 24th Jan 2024 at 8pm, where we will share some investing strategies to help you create assets that can give you a monthly income for life. You will feel more confident in managing your money matters as most of our attendees can testify. Register for the zoom link – select “Invited by Victor” - here: https://www.thelifetimeincomestreams.com/tlisvip .

?

To reach me over my personal Telegram chat, click here: t.me/victorfong

?

Subscribe directly to my Telegram Channel for more life and money tips delivered weekly: t.me/victoriousfinance