2023 Year In Review

I hope you buckled up because 2023 provided a bumpy ride to higher ground in the stock market inflation rates dipped, interest rates plateaued, and the much-anticipated recession most prognosticators called for never came to pass.

With 2023 now in the books, it’s always helpful to reflect on the year that was. Did I achieve my resolutions? Am I in a better place than I was at the start? And what is on the horizon?

For me, I set several resolutions to start the year - as I often do - but there’s one big one I accomplished - running 1,000 miles. This wasn’t easy; I didn’t move as quickly as I would have liked, and my progress throughout the year was spotty to say the least (sound familiar?!). From that long vacation in June that knocked me out of routine with only about 50 miles logged to that bout of COVID that took me off my feet for a week unexpectedly - the resolution didn’t exactly go as planned. But in the end, by staying the course and remaining dedicated to the goal, I was able to hit my 1,000th mile just under the buzzer.

This feels rather analogous to the markets this year. Many of you likely saw my note a couple of months back on Red October. Had you gone to sleep on New Year's Eve with a diversified portfolio and woke up on Halloween, your portfolio would have been close to flat on the year.

Two months later, most diversified portfolios that remained invested throughout the entire calendar year saw returns creeping into double digits - thanks to a late-year market rally that rewarded patience and staying the course amid scary headlines and, at times, gut-wrenching volatility. Furthermore, those portfolios that weathered the storm often benefited from the volatility through tax-loss harvesting during some of the darkest days of October. And while we don’t encourage folks to log in and check on portfolios daily, we’re constantly monitoring them.

Looking back to the start of 2023, many of us are in a better place than we were then. There are a variety of reasons for that across the economic and investment landscape:

Unemployment - remains incredibly low at 3.7%
GDP growth - Q3 saw year-over-year economic growth of 2.9%, showing an economy that’s still expanding despite the drag of inflation and drop off of COVID stimulus.
Inflation - the Headline CPI for November was 3.1% year-over-year, down from nearly 9% at its most recent peak.
Wages - to complement the drop in inflation, wages still rose nearly 4.3% year-over-year, showing real wage growth for earners this past year.
S&P 500 is near its all-time high from early 2022, despite trading at 19.5x earnings, rather than 21.4x earnings as it was then - a better price for the market high point.
Yields on cash savings spiked - now at nearly 5% for some HY Savings accounts - along with inflation drooping, meaning for the first time in nearly 15 years, you can earn a real yield on cash after inflation.

Looking at asset class returns, we can see that Large US Stocks led the way up 26%; followed by Developed International Stocks and Small US Stocks, both up in the high teens. Real Estate rallied from a crushing start of the year to finish up 11.4%.

Emerging Markets, Bonds, and Cash all put up single-digit returns last year, while commodities - which led the way in 2022 with 16.1% gains took a hit - dropping 8%.

These positive returns for most asset classes and strong economic indicators did not mean everyone fared well in 2023.

The first few months of the year saw large banks like First Republic, Silicon Valley, and Signature go under for poorly managing their liabilities in a rising interest rate environment. Part of this led to more consolidation in banking - with JP Morgan Chase gobbling up First Republic.

While the crypto market saw some gains throughout the year, there was also continued cause for concern in the evolving space. We saw Sam Bankman-Fried stand trial and get convicted for fraud and Binance pay a $4B fine for engaging in money laundering, among other charges while its CEO stepped down.

Overall, 2023 saw markets rally back from a dismal 2022, inflation rates subside, and the Fed achieved its once-considered impossible ‘soft landing’ without a recession. Investors who stayed the course throughout the year were rewarded well - especially in late Q4 - when the market posted most of its gains.

Benchmark Returns

It’s easy to get caught up in the headlines of S&P 500 returns in 2023, but as you can see, the average diversified portfolio ended the year up about 14% - not 26%. The beautiful thing about being diversified is that your portfolio never does as poorly as the worst asset class - which was down 8%; nor as great as the best, up 26%. True diversification means that the various components of your portfolio don’t all move together at once.

In 2023, US equities - Large and Small companies - helped power returns, as did Large International Companies - all above the average portfolio. Real Estate, Small International Stock, and Emerging Markets all came in near the low double-digits. Most fixed-income and cash investments put up single-digit returns.

This is a contrast from 2022, when all three of the top-performing asset classes from this year lagged beyond a diversified portfolio - with Small Companies down 20%; Large Companies down 18%, and Large International Companies down 14%; all trailing the Asset Allocaiton portfolio that was down 13.9% - buoyed at the time by fixed income, cash, and commodities.

Chart of the year:

One of the many reasons we advocate for index funds is the ability to capture market returns, at a low cost, without trying to be a stock picker. And being a stock picker would have been tough in 2023 as 72% of the stocks in the S&P 500 underperformed the overall return of the index.

AJ GrossanJanuary 10, 2024