Markets are Non-Linear

The end of the year is traditionally a good time to look back and reflect on important market developments, which helps us assess how far we’ve come over the 12 months prior and where we could be headed in the future. While 2023 delivered many notable events, a select few are especially worth mentioning, mostly as a reminder to us all that what may seem “impossible” is often just a few interest rate hikes away. Beginning with the obvious: FTX was one of the biggest disasters of 2023. Once known as the crypto industry’s “darling” worth more than $32 billion at its peak, things quickly turned south earlier in the year when the company was exposed as a conduit for fraud. FTX went bankrupt in just a matter of days, bringing down the credibility of multiple high-profile celebrities with it. The founder, Sam Bankman-Fried, was found guilty of fraud and conspiracy. Next came the Silicon Valley Bank (SVB) chaos that ensued back in March. The bank began to struggle as the venture capital market dried up this year. Startups began siphoning funds from SVB and the bank ultimately failed due to their inability to properly manage its bond portfolio amidst the Fed’s high interest rate campaign. SVB's 40-year tenure came to a disastrous and abrupt end with the FDIC taking control of the bank. Fortunately, the government decided to guarantee all of SVB’s depositors, even those above the traditional deposit limit of $250,000. Unfortunately, First Republic and Signature Bank also fell victim to the contagion and collapsed during the mini banking crisis.

These examples are stark reminders of the importance of risk management and the necessity of market corrections. Most of the bitcoin and NFT noise has quieted down after the FTX fallout, as well as the obsession with over-valued “unicorn” startup companies that did nothing but burn cash. As a result, a much needed removal of fluff from the market took place this year…

It may seem counterintuitive that while our government was financing a war in Ukraine for a second year, and our central bank (FED) was tightening monetary conditions (which led to a mini banking crisis and a government debt downgrade by credit rating agencies), we remained very optimistic about the economy and the stock market throughout this year. However, our optimism was far from blind. Instead, it was based on sound economic data and strong fundamentals, all of which we continuously shared in client communications during the year.

The pandemic emergency ended and supply chain problems were easing. Inflation began coming down; therefore, interest rate hikes would also need to end. Rising wages were boosting retail sales, thus, pushing Gross Domestic Product (GDP) and corporate earnings higher, all of which are extremely conducive to higher stock prices. Yet, the voices of doom and gloom persisted throughout the year, even in the face of progressively stronger quarterly GDP growth readings of 1.1% (Q1), 2.1% (Q2), and 5.2% (Q3). (See chart above.) Understandably, investors who focused their attention on the continuous forecasts of an upcoming recession in 2023 sold their assets at (or near) the bottom and remained largely out of the markets. In retrospect, that was a costly decision as the stock market indices have once again reached new all-time highs as of this writing. While there are (and always will be) causes for concern, and markets are known to turn on a dime based on public sentiment, we prefer to follow the data and look for the fundamental strengths (or weaknesses) in the economy, which determine corporate earnings and stock prices in the long run.

Early in the year, economic data suggested that 2023 was looking much better than 2022, and as a result, we remained invested and portfolios benefited from the improving economic conditions and rising stock prices. It is useful to remember that markets don’t move straight up (or down). For every extension higher there is a retrenchment lower and vice versa. Inevitably, a recession will come. Once again, the data will tell us if it’s shallow or deep, short lived or long lived, and what adjustments are needed in regards to client portfolios. Exactly when this happens is anyone’s guess. But, what we do know is that currently there is a lot of liquidity (more than $6 trillion parked in Money Market funds) that could push this market higher into 2024. As interest rates are expected to decrease during the upcoming year, investors will be incentivized to hunt for higher yield via the stock market. Additionally, the fourth year of a presidential term has historically been positive for the stock market. Nevertheless, investing is never easy. The market is not linear. And emotional investment decisions should be avoided as they often end in regret.

We never want you to feel alone on this journey of investing and that’s why we’re always here to offer our objective assessment of the economy and the markets.

Thank you for your continued trust.

Here’s to a prosperous and Fierce new year!

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