DWM’s 4Q23/Year-End Market Commentary: All Good When the Superheroes Are Present

January 10, 2024

With all the recent talk about the “Magnificent Seven”, I can’t help but conjure up images of superhero groups like the “Fantastic Four” or “S.H.I.E.L.D. 6”. There seems to be a lot of similarities between the superhero world and the markets lately…. Remember those old Batman shows when the Caped Crusader and his sidekick Robin would get into a conflict and words like “Swoosh”, “Splat”, “Bam”, “Ka-Pow”, “Crash”, and “Boom” would appear all over the screen?!? Well, those words also seem appropriate for how the markets fared in 2023. Consumer sentiment within our country’s financial Metropolis was pretty low entering the year with many predicting a recession that never materialized and more stock market carnage after a disastrous 2022. Investors also feared the biggest supervillain of them all: inflation. But the Fed, who could have been referred to as the “Suicide Squad” in 2021 & 2022 for partly creating the Super Inflation Villain suddenly became more like the “Justice League” by rising rates efficiently thereby reducing the Super Inflation Villain to limited powers. All the while, keeping the economy humming along. With this Joker seemingly conquered, the Fed last quarter pivoted and signaled that it appears to be done with raising rates and most likely dropping rates in 2024. The people of Gotham and most of our world rejoiced sending almost all markets up, up, and away in 4Q23! But is it really “mission accomplished”??? Read on to find out… But first let’s take a look first at how the major asset classes have fared in 4Q23 and then talk about what’s next.

Equities: Santa, via his Santa Claus Rally, played superhero the last couple of months sending most stock benchmarks up double-digits in 4Q23! For the year, the major stock benchmarks returned a range of +7.9% represented by the MSCI Emerging Markets to 26.3% represented by the S&P500.  And what a year for the “Magnificent Seven” - the actual term used for the tech marvels pioneering the future in technological innovation consisting of Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Telsa – which soared 111%!!! “To infinity and beyond”??? Maybe, maybe not – almost of all these names are characterized by sky-high valuations; any earnings warnings out of this group could pop what more and more looks like a little bubble. Not since the late 90s have we seen such dispersion between the SP500 market-cap based return and the equal-weight based return. From the slide below, you can see that the Top 10 stocks in the SP500 rose 62% on average and are now trading at a 38% premium whereas the Bottom 490 stocks rose just 8% and are trading at a 12% discount! The point is that now is not the time to supercharge in any one area - diversification is key! A superhero at DWM once said, “Building a diversified portfolio is akin to assembling a superhero team with a variety of powers. Each asset class or investment acts as a unique superhero, contributing different strengths to the overall resilience of the portfolio. Just as a well-rounded superhero team can handle a range of threats, a diversified portfolio can better weather market uncertainties.”

Fixed Income: After a villainous 2022, many were calling for a reversal in bond land and expecting positive returns. Fixed income markets showed life early on in 2023, struggled for several months, then rallied on the “Fed Pivot”. The Barclays Aggregate Bond Index (“AGG”) turned in one of its best quarters ever in 4Q23, up 8.1%! In our last quarterly commentary, like the Hulk, we pounded the table on bonds, saying “we think fixed income is becoming more and more attractive as we get closer to peaks in rates.” The Fed signaled a pivot and – SHAZAM! - hence the rally. For the year, the AGG returned 5.5%.

Alternatives: Think of alternatives like your Guardians of the Galaxy team, i.e. a very mixed bunch that ebbs and flows working to protect you. Big winners in this category for the year included gold* +11.5%, Real Estate** +11.9%, and some hedge funds like a favorite of ours, Victory Market Netural Income Fund, which was up 7.3%. The big winners of last year, Managed Futures, in general stumbled this year with all the whipsaw. General commodities as represented by the Invesco DB Commodity Tracking ETF were down 6.2%. For the record, the Wilshire Liquid Alternative Index returned 2.0% for 4Q23 and 4.5% for calendar year 2023.

In summary, it was a very nice bounce-back year for investors. After an evil 2022, 2023 came to rescue, surprising most everyone with heroic returns. A diversified investor, depending upon the mix of investments, could be looking at an overall double-digit return from 2023. With 2023 in the Batmobile’s rear view mirror, what should we expect in 2024???

2024 stands for:

2: After a strong 2023 GDP, we’re expecting growth to get back to normal, around 2%. 

0: Chances of recession in 2024 are close to 0% given decent growth with lower inflation.

2: Inflation is just over 3% now (down from its 9% peak) and should continue to come back toward the Fed’s 2% target.

4: The unemployment rate should stay at or around 4%. What’s amazing that the despite unemployment being so low, wage inflation which just recently was at a four decade high, has come back down to more normal levels as seen below – a very encouraging sign.

Sounds pretty good, right?

Of course, there are no guarantees on how this plays out. There were plenty of times when Clark Kent thought all was well, only for Lex Luthor to resurface. Kryptonite could be right around the corner in the form of:

  • Reemergence of the Super Inflation Villain - perhaps brought on by rising oil costs or something else - could persist with central banks responding with tightening monetary policies.
  • Global Geopolitical tensions: beyond Russia/Ukraine and Israel/Hamas, some other threat(s) could emerge.
  • Social Unrest/Political Instability: with the Presidential Election happening in 2024, it will surely be all over the news and social media, and could affect the markets. That said, studies show like the chart below, that US GDP and stock returns have been good over the years REGARDLESS of who’s controlling Washington.

In conclusion and as we venture into the next yearly chapter of investment saga and triumphs, let us embrace the heroic spirit that defines the world of finance. With each challenge comes an opportunity, and with each setback comes the potential for a comeback. As we continue our journey through the investment frontier, may we navigate the uncertainties with the courage of superheroes, always prepared to face the unexpected and emerge victorious in the pursuit of financial prosperity. As Bane in the Dark Knight Rises said, “It doesn’t matter who we are, what matters (most) is our plan.” For those readers that aren’t already clients and don’t have a plan yet, consider visiting the superhero team here at DWM. We can help your create and monitor your investment/financial plan. And before you know it, you may think of us as the Incredibles!

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

* represented by iShares Gold Trust

** represented by the iShares US Real Estate ETF

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page