Looking back at 2023, we reflect on all the events that took place during the year, consequently increasing volatility and uncertainty in the market. Despite all the unexpected events, inflation decreased significantly, interest rate hikes came to a halt in Q4, we did not enter a recession, and the S&P finished with great returns. As we enter this new year, many of us have learned that the market will do what the market does and how staying disciplined can reward the investor. Others may continue to worry as new events arise, not to dismiss the possibilities of events that can still impact the market, in part because investor behavior plays a huge role in the market. But most importantly, this is the time to connect with your advisor to assess whether your portfolio is allocated appropriately and meets your goals.
Recall when we entered 2023 with 6.5% inflation and high interest rates; here we are entering 2024 with 3.4% inflation and a slightly higher interest rate of 5.25%-5.5%. The Federal Reserve did an excellent job at raising rates slowly and steadily without having the economy enter a recession; after all, their goal was and continues to be to achieve a soft landing. Throughout the year, the economy proved resilient. However, it was hard to believe unemployment would remain below 4% despite increasing interest rates. Let's not forget the possible "recession"; we ended the year with a 3.4% inflation rate and the S&P up 24.23%. As you can see in the chart below, both CPI and Core CPI have been trending down since the beginning of 2023, but Core CPI (Excluding food and energy) sits at 3.9% year over year as of December 2023.
The fight is ongoing until inflation reaches its target rate of 2%. The Fed has had some challenges, but it appears we are at the end of the tightening cycle. As mentioned in their December meeting, rate cuts are expected later in the year; projections show the Federal Funds Rate to range between 4.4%-4.9%, well above the inflation rate. It's important to highlight
that economic growth has made it more difficult for the Fed to decide its next move. GDP increased 2.3% in 2023; the December jobs report showed an increase of 216k in non-farm payroll, with unemployment at 3.7% and the economy showing tremendous strength; the Fed remains cautious. During their last three meetings, they agreed to keep rates at their current level of 5.25%-5.5% and hinted to bring them down during their January meeting. Keeping rates at their current level, boosted optimism among investors and was immediately reflected in December's market performance. This celebration may be premature as interest rates have not been reduced yet, and we are far from where we started two years ago, and zero rates may be forever gone.
It was another surprising year for the market. We had great returns, but there was a considerable dispersion among different market areas. The magnificent seven, as they are called, drove most of the market performance for the year. These seven stocks had incredible returns, but let's remember how, in 2022, they were some of the biggest losers, where a few have yet to recover from their highest peak in 2021.
The performance of these stocks and the tech sector was mainly due to the rage about AI (artificial intelligence). Will this trend continue? There is potential as this technology improves and gets adopted by many industries. The key takeaway is the importance of having a diversified portfolio that best fits your needs. How well are you able to handle this level of volatility?
As history has shown, the markets are complex, and even experts cannot predict what effect specific economic changes or events will have on the market. Sometimes, we can determine the market's direction on a positive or negative trend, but we cannot tell the exact moment when it will change. The reverse holds as well; we may know when the change will happen but cannot tell which direction the market will move, whether it could be upwards or downwards. Also known as the uncertainty principle, although we can make assumptions based on rational expectations, too many factors influence outcomes, making it impossible to determine what will happen. Aside from reaching the
inflation target of 2% and
navigating the market with a high-interest rate environment, the other big topic this year is elections. Yes, we may see increased volatility as we approach elections, but most of the time, the market often bounces back shortly after. There is a big misconception about election years negatively affecting market performance, "Vanguard research dating back to 1860 finds no statistical relationship between the performance of a 60% equity/40% bond portfolio in a presidential election and non-election years," as you can see, the chart shows S&P returns during and after US election years.
Corinthian takes a proactive approach when managing portfolios. This is not to say we're predicting what will happen in the future, but we want our portfolios to shield against any events that could impact our client accounts to help mitigate some of the risks of the market. As discussed during our reviews, when we entered 2023, we took a more conservative approach due to high inflation and the high interest rate environment. As interest rates peak, we have agreed that it is time to shift some cash into the equity market and increase our exposure to short-to-intermediate bond funds. Many treasuries are coming due during this quarter so that you may see increased trading in your accounts. As a planning firm, we consider any tax implications that may be incurred during transactions. As we embark on a new year, we want you to know we are here to support you and your families. We encourage you to focus on your long-term goals and stay on course.
Vanguard webcast resource. Strategies for success in a higher rate world “Vanguard Economic and Market outlook for 2024: A return to sound Money” PDF. Accessed 1/23/2024.
Dimensional “Market Returns During Election Years” slides, accessed 11/14/2023.