Roller Coaster

I remember in the early ’80s being very excited to go to Six Flags. My favorite ride was the old wooden roller coaster called the Scream Machine, which had a gigantic first hill, both up and down. I would be on pins and needles as it went up, and then scared when it went down the hill. Well, the investment markets in 2023 were like that first hill. After such a difficult 2022, 2023 was also a roller coaster ride. If you simply looked at your accounts on the first day and last day of the year, it was a great year, but if you looked in-between, it was certainly a rickety roller coaster ride up and down.

Some of the same headlines dominated in 2023 as they did in 2022, which included the Ukraine war, inflation, the Fed, and of course, the attack on Israel and the subsequent military response. The reality for markets is there is always something going on, and they cause unpredictable short-term volatility. If the outcome of these events were known, the market would never respond to them as we’d know how the story would end, but that is not the reality of the world we live in. Below is a chart that shows some significant events from 1999-2019 and the market returns subsequent to that. 

What does this tell us? There will always be ‘something’ going on, but ignoring the noise and sticking to a long-term allocation based on planning, not emotion and gut feel, will win. If anything, down markets like 2022 turn out to be huge opportunities, and that was certainly the case for investors putting money to work in the downturn through 2023.

In 2023, virtually all asset classes had positive returns, with most of those returns coming in a very short amount of time (from mid-November to the end of December). Through the end of September, the markets were barely positive, except for the Magnificent 7 AI stocks, but we ended the year with a furious rally. This was mostly driven by the Federal Reserve stating that they were going to pause on rate hikes, and possible rate reductions could be on the horizon. We’ve talked about how concentrated returns can be in the markets, and this time period at the end of 2023 could be one of those crucial up markets that help propel long-term returns.

The chart above shows how concentrated market returns could be. From 1990 to 2022, a $10,000 investment left in the markets grew to over $600,000. Missing just 50 of the best days out of 32 years resulted in a ‘loss’ of over 90% of the gain. This tells us that market returns are highly concentrated, and being out of the market can cause irreparable harm to portfolios. The year-end rally, as noted above, is likely to be one of those important periods for long-term investors.

What does the crystal ball show going forward? Well, as we’ve said many times before, short-term markets cannot be timed or predicted – there is no evidence that anyone knows how to time the short term. It’s possible that the Fed engineered a Goldilocks scenario by bringing down inflation and, at the same time, not throwing us into a deep recession. Historically, when the Fed stops raising rates and indicates cutting rates, this is positive for both the stock and bond markets. As an investor with cash on the sidelines, this may end up being a good time to put funds to work. 

Although stocks have gone up in the past year, valuations in parts of the market are still attractive. Valuations in the US, outside of the AI stocks, are not cheap but reasonable, and international, small-cap, etc., are still attractive. Our prescription is to stay invested, keep an eye on valuations, be careful of the areas that are expensive, and stay diversified.

A planning-based investment plan along with a keen eye on diversification has worked over time, and it will continue to do so for long-term investors. We take our job of being a steward of your hard-earned money very seriously, and we welcome any questions and concerns you may have.

Raj Chokshi, CPA, MBA, CFP
Partner – Bluerock Wealth Management