4th Quarter 2023 Review & Commentary: Thank Goodness for a Breather
2022 was an ugly year for everyone. Thank goodness for 2023! These 2 years were pretty much complete opposites. In 2022, the “Magnificent 7”: Google, Apple, Microsoft, Meta, Nvidia, Amazon, and Tesla were on an average downward trajectory of -45.0%. These stocks are very volatile but often lead the market. Conversely, 2023 saw a 107% return in these stocks. Additionally, on an equal-weighted basis, these stocks accounted for more than half or the S&P 500 return for the year. In essence, this example shows the recent wild rides of the equity markets. As we have stressed, the short-term perspective can get good intentions into a lot of trouble. Two of my favorite investors, Warren Buffet and Charlie Munger, had some good advice on this subject. Buffet said,” if you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” Charlie Munger’s advice was, “avoid crazy at all costs.” Thus, both captains of investing think the market can be very schizophrenic in the short term. This is something we all saw in 2022 and 2023, and is why the longer-term investor almost always wins the day.
The 4th quarter of 2023 was especially kind to investors, and for the year, the S&P 500 posted a 24.23% gain, which made up for 2022’s loss of -19.44%. Small cap stocks were lagging the S&P 500, but they were up 15.09% for the year, according to the Russell 2000. The key to the tumultuous ride was the Federal Reserve. They raised interest rates 11 times starting in 2022 and are now considering a change. This is a hard place for them because they don’t want to stop or cut rates too early because inflation could raise its ugly head again. This is what Paul Volker, former chairman of the Fed, had happen many years ago. However, now the Federal Reserve seems to be supporting a less restrictive interest rate policy as inflation has pulled back some. Therefore, this new Fed position was particularly helpful in raising the price of many asset classes in the 4th quarter of 2023. Inflation eased back after peaking at 9.1% in June of 2022; however, the deflationary trend remains higher at an annual rate of 4%, rather than the Fed’s target of 2%. Core inflation has remained sticky between 4-5% (includes food and energy).
In terms of the economy, the consumer and the Fed saved the day for 2023. We sailed right through all the recessionary talk and have experienced what some might call a soft landing, but all isn’t rosy in investment land. Our national deficits are very concerning. We are going to have to pay the piper sometime with higher taxes or additional forms of taxation. Obviously, this is rarely discussed by politicians, but I imagine it will be more of a topic in 2024. Our clients remain positioned according to their investment policy preferences, and we are well positioned for the long term. Cash levels are reasonable and ready to take advantage of pullbacks, and we are now getting a much higher return on our allocations to cash.
Finally, Charlie Munger died at the old age of 99 in the 4th quarter. He was a smart investor who hated risk. To paraphrase Mr. Munger, don’t spend your time and money trying to be too intelligent in the markets. Time is better spent consistently not being stupid.