Q4/2023 Market Update
2023 is now officially in the books, and it was definitely one for the books! Looking back the market was coming off a terrible 2022 with the S&P 500 returning -18.11%. Not many were expecting 2023 to turn around so rapidly and aggressively. For 2023, the S&P 500 closed out with a total return of 26.44%!! From an economic standpoint, the US continued to show strength with a minimal increase in unemployment and moderating of inflation during the year. This performance expectation has also been carrying forward into 2024 with analysts expecting moderate growth in the economy, interest rates falling, and corporate earnings to hold steady.
TL;DR: The S&P 500 rebounded with a 26.44% return in 2023, amidst a stable U.S. economy. Analysts project continued moderate growth for 2024. Market dominance by top tech stocks underscores the importance of diversification, as international markets have shown periods of superior performance. The Fed's rate policies remain pivotal. New Beneficial Ownership Reporting enhances financial transparency.
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The Magnificent Seven; a Western Story or the Most Powerful Companies in the World?
The S&P 500 is exhibiting a pronounced concentration of influence and value within its top 10 stocks, revealing a market heavily weighted by tech giants as of December 31, 2023. These titans, which include household names such as Apple and Microsoft, have not only outpaced the rest of the index with a commanding 86% share of total return since January 2023 but also boast a forward price-to-earnings ratio well above the index average, suggesting investor confidence in their future growth.
This concentration is further underscored by their combined market capitalization, which stands at 32.1% of the S&P 500, reflecting an upward trend in index dominance not seen since the late '90s. Despite this, the earnings contribution of these companies is slightly lower at 23.2%, indicating that their market influence might be more speculative, based on growth expectations rather than current profitability.
The dynamics shown in this chart points to a potential vulnerability within the index; its performance is increasingly tethered to the success of a few, albeit powerful, players. For investors, this could mean higher risks and the need for careful consideration of portfolio diversification to mitigate potential volatility tied to these top performers. The narrative woven by the data presents a market at a juncture, where the balance between growth potential and concentration risk is more critical than ever.
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Navigating Changes in US Economic Growth
The future of U.S. economic growth hinges on a complex interplay of demographic shifts, capital investment trends, and productivity. The growth of the working-age population, historically a bedrock of economic expansion, is decelerating. Notably, immigrants are becoming an increasingly vital component of this demographic, suggesting that immigration policies could significantly influence future labor market dynamics and economic health. Look for this to be a very important part of the conversation in the upcoming Presidential Election!
Capital investment patterns offer a glimpse into the evolving economic landscape. There's a pivot away from traditional physical assets towards intellectual property and research & development, highlighting an economy transitioning toward innovation and knowledge-based industries(can you say AI??) This shift is indicative of a broader global trend towards intangible assets driving economic value and growth.
The narrative emerging from the data is one of transformation. The United States is navigating a delicate balance: managing demographic changes, fostering an environment conducive to intellectual and technological investment, and promoting productivity. These factors are not only imperative for economic growth but will also shape policy decisions and investment strategies in the years to come. As the economy grapples with these shifts, stakeholders must recalibrate their expectations and approaches in preparation for a new era of economic drivers.
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Interest Rates --- No Longer Higher for Longer...
The Fed is continuing to attempt to keep its finger on the economic pulse. They have shown forecasts of seesawing key economic indicators. Growth in real GDP looks to simmer down from the spicy highs of 2023, steadying into a more digestible range over the next few years. Unemployment rates, while low, are expected to tick up slightly, causing perhaps a few sleepless nights for economists.
Inflation, that ever-present concern of the FOMC, is projected to cool off from its recent boil, with both headline and core PCE inflation anticipated to drift downwards. This is where the rubber meets the road for interest rates — high inflation typically invites rate hikes as the Fed's go-to move to keep the economy's wheels from spinning out.
In the end, this chart isn't just about numbers; it’s a narrative of anticipation, a financial fortune-telling that will ripple across investor and corporate strategist alike. As we watch the new year form, one thing is certain: the Fed's interest rate policies will remain a protagonist in the economic story of 2024.
Market Performance 4th Quarter, 2023
In 2023 the financial markets offered a tale of resilience and reward. The US Stock Market, produced a staggering 25.96% return over the past year, outshining its global counterparts. This rally is really a continuation of the strength of the past 5 years with annualized gains at 15.16%, and even over a decade, delivering a solid 11.48%. The narrative, however, isn't solely American. International developed stocks have held their own, with near 18% growth in the past year, indicating a growing confidence in global economic stability.
Emerging markets, often the wild cards, have posted respectable gains but tell a story of caution with a more modest 9.83% annual increase, reminding investors of the potential volatility that comes with high-growth prospects. Real estate, the backbone of hard assets, has proven its worth too, especially globally, with a double-digit uptick in the past year. U.S. bonds have found their footing from their terrible performance in 2022, with a steady 5.53% return this year, a pace they've maintained over a 5-year span.
Zooming in on the fourth quarter of 2023 – a snapshot that captures the short-term wins and stumbles across the markets. U.S. stocks skyrocketed with over 12% growth, while international developed stocks weren't too far behind.
Over two decades since 2001, the average quarterly returns paint a picture of steady growth with occasional peaks and troughs, teaching the seasoned investor the timeless lesson of patience and perspective.
Across Borders and Asset Classes: Building Resilient Investments
The juxtaposition of these two snapshots from J.P. Morgan provides a compelling narrative on the importance of diversification in asset allocation. The first snapshot, detailing the cycles of U.S. equity outperformance, paints a vivid picture of economic ebbs and flows. It reveals that while U.S. markets have enjoyed long periods of dominance, there have been significant stretches where international equities have not just competed, but indeed outpaced U.S. performance. The standout moments include a towering 299% cumulative outperformance by international markets over a 5-year period, emphasizing the potential rewards of global diversification.
The second snapshot offers a broader view, showcasing the annual returns across various asset classes from 2009 to 2023. The quilt of returns underlines the unpredictable nature of market leadership. The patchwork of colors reflects years where commodities triumphed, periods when real estate reigned supreme, and intervals where equities led the charge.
Together, these charts serve as an important reminder that market leadership is always shifting. The stark contrast between domestic and international markets, and the variability among asset classes over the years, underscores the wisdom of diversification. It's a strategy that allows investors to participate in the upside while mitigating the risk of being overexposed to any single market or asset class during its inevitable downturns.
The message is clear: placing all your bets on a single market or asset class can be akin to gambling on the weather—unpredictable and often unforgiving. A well-diversified portfolio, conversely, is like a well-constructed vessel, designed to weather all conditions, be they stormy seas or favorable winds, ensuring a smoother journey through the shifting tides of global markets. The historical dance between U.S. and international markets is not just a financial lesson—it's a call to spread one's investment sails across the diverse oceans of opportunity.
The Planning Corner
The recently introduced Beneficial Ownership Information Reporting requirement marks a significant shift in financial transparency and anti-money laundering efforts by the US Government. It is aimed at peeling back the layers of anonymity in financial entities, and requires corporations, LLCs, and similar entities to report the identities of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). A "beneficial owner" is defined as any individual who directly or indirectly exercises substantial control over an entity, or owns or controls a certain percentage of the equity interests. This is now an annual reporting requirement, with any organizations formed prior to 2024 with a requirement to file it before year-end. I recommend that if you have an interest in an LLC or Corporation to go ahead and register for a personal FinCen ID. You can do that here: https://fincenid.fincen.gov/landing The process takes a few minutes you are provided a unique FinCen ID you can provide when asked to report your ownership interest in entities.
For those that are responsible for this reporting, gather up your data and go to this website to go through the process: https://boiefiling.fincen.gov/
Are you not sure about whether these apply to you? We are happy to be a resource for you! Reach out to me at daniel@refocusfp.com
Hope you enjoyed this Quarterly Update!
Daniel Johnson, CFP®
daniel@refocusfp.com
