All years have surprises for the financial markets, in addition to what I’m hoping for you, I also hope that there are fewer surprises for markets this year than last. 2023 surprises were harder than usual on investment managers and consequently, fewer managers than usual were able best their benchmark indexes. There was the recession that never came, The Magnificent Seven stocks that accounted for 100% of the markets gains for the first 10 months of the year. There was Fed Chairperson Powell’s surprise move from hawkish to neutral followed be a more surprising market interpretation that Powell had pivoted beyond neutral to uber-dove and would be cutting rates post-haste. Stocks and bonds turned on the flip of a switch from 10 months of dreck (except for 7 stocks) to 2 months of glory. See performance chart below.
With all the challenges last year presented, it was another year where I thanked my lucky stars that I adopted a model investing methodology in Q1 of 2015. As you’ll see in your report that follows, both models, TQM for taxable accounts and TQM-IRA for non-taxable accounts, matched or beat their respective benchmarks, putting them both in rarefied air for the year against other investment methodologies. And that’s for the public markets, thanking more stars, Stuart Katz and his/our RS Investment Office for the over-all stellar performance of your private investments this year. I’m looking forward to reviewing all this with you on a review call in the coming weeks.
Near term, I suspect markets pulled some of 2024’s gains forward into year-end 2023, and markets are ahead of themselves. That is usually a recipe for correction, and it seems one has started as I write (Friday, 1/5). Normally, the first correction following an unusually correlated stock and bond barn-burning 9 weeks is not too deep and doesn’t last very long. That said, I do expect a choppy market through the first quarter as the gap between the Fed Chair’s pivot to neutral and the markets more bullish discount to “dove” tends to narrow.
I still believe there is a good chance for a recession in the end of this year. And it may appear as a soft-landing initially, but it is unlikely to be maintained for long. When an economy reaches full employment, the central bank needs to calibrate monetary policy almost perfectly to keep it there. If it does not cut rates fast enough, unemployment will increase; if it cuts rates too fast, inflation will rise. If no recession, then the chances of a second wave of inflation go up. Neither a recession nor a second inflation wave would be good for equities.
The bad news is that I’m not a roaring bull for the coming year – maybe markets are choppy and flat-ish at best. The good news, the models should have you covered.
Be well,
Mike
Source: Addepar, BCA Research, Bloomberg, Ned Davis Research
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