All data and commentary as of January 3, 2024.
Since the beginning of 2022, we have seen 7 consecutive quarters of choppy, uncertain markets. However, it seems that an optimistic paradigm shift is finally taking hold across both equities and bonds as stocks have clawed their way back up to pre 2022 highs and the Fed has started to pump the brakes on its aggressive rate hike cycle. After an abysmal 2022 for both stocks and bonds, this year has proven much more rewarding for investors, with the S&P 500 up 26.29% for the year and the Barclays US Bond Aggregate up 5.60%. This run-up has not been without volatility, and there has been no shortage of catalysts for market movement over the course of the year. The attached graphic from JPMorgan does a great job of detailing FORTY different newsworthy events that have moved markets in 2023.
After consistently raising rates for the last two years, the Fed took a notable step back from their aggressive stance and held rates steady in their recent December meeting. In addition, Fed Chair Jerome Powell began to hint at rate cuts in 2024 for the first time, which sent both bond and equity markets soaring in reaction to this shift. This is good news for consumers as we look forward to 2024 for a number of reasons. As yields fall, bond prices increase – meaning bond assets will have significant performance tailwinds as rates stabilize and eventually begin to decrease. In addition, falling rates also push down interest rates on mortgages and credit cards – making housing and budgetary spending more affordable for consumers. Falling interest rates can also be a boon to stock returns – it allows businesses to borrow at lower interest rates to complete projects and expand their business operations. While there will likely be some continued volatility as we move into the new year, most analysts would agree that the worst is likely behind us in the bond market.
While a decreasing rate environment has numerous benefits for consumers, there are also some minor drawbacks to pay attention to. The interest rates on conservative, fixed yield investment vehicles like CDs and money market accounts will also begin to fall as the Fed steps away from its rate hiking campaign. We are keeping a close eye on this sector, but the days of seeing CDs and money market accounts paying over 5% interest are likely numbered. Unless these types of holdings are being earmarked for a known upcoming cash need, it will most likely be prudent to reinvest these assets into traditional bond funds later this year.
Equities have seen a significant rebound in 2023, although the 26.29% performance of the S&P 500 for the year was largely held up by a select few mega-cap technology stocks known as the Magnificent 7 (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla). Although the majority of equities significantly lagged the explosive returns of these AI-centric stocks, solid returns across the board for equities in Q4 mean that stocks have some good positive momentum heading into 2024.
As it relates to your portfolio, all of these changing market dynamics have prompted us to make some tweaks to our model allocations over the past quarter. Around Thanksgiving, we completed an initiative to extend the duration of the bond side of all client portfolios and sunset a couple of model holdings in order to keep our models as fee and tax efficient as possible. Duration is a measure of a bond’s sensitivity to interest rates, so extending the duration of a portfolio means more potential upside as rates stabilize and eventually begin to fall. Couple this with the structured notes and CIM Real Asset and Credit fund we implemented for select clients earlier this year, and we feel portfolios are well positioned for the environment we expect to see in 2024.
We have also been working behind the scenes to make some exciting operational investment updates by leveraging technology. Rather than rebalancing portfolios at fixed calendar intervals, we are implementing a drift tolerance based rebalancing strategy in the upcoming quarter. This allows us to monitor portfolio allocations on a continuous basis and react more quickly to market changes. In turn, we will be able to proactively keep allocations as close to established targets as possible.
We want to thank our clients for your continued partnership, and we are excited to see what 2024 has in store! Please don’t hesitate to reach out if you have any questions or would like to schedule a call to discuss your portfolio. We look forward to meeting with you soon!
Jake Fromm | Lead Investment Analyst, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.