January 22, 2024

S3E2 – 4th Quarter 2023 Economic Review

4th Quarter 2023 Review

Join Dave and Nick as they review 2023’s fourth-quarter economy and give a current market update.

We do this once a quarter to go through and see what happened last quarter and talk about what that potentially means for the future.

Watch on YouTube HERE

How Did We Do the 4th Quarter?

The fourth quarter was pretty darn good. The Wall Street Journal called it The Everything Rally in late December.
Every subclass of stocks was positive, and every bond category in the U.S. was positive. It was quite the fourth quarter.

It’s a good time to be a financial advisor. People think we look really smart in the fourth quarter, even though we did absolutely nothing.

This is especially amazing when you consider where we came from and what people thought was going to happen last year. The forecasts for 2023 were so gloomy. It was really hard to be positive about anything last January, and that’s just not how it played out. This just underlines that you can’t predict with any reliability.

We are measuring a good market return instead of the recession that was expected. It looks like the Fed may have pulled off the soft landing scenario, which is where they were able to raise interest rates drastically and bring inflation down drastically, and yet still we have strong economic numbers in terms of unemployment and consumer spending.

“This Too Shall Pass”

We use this phrase a lot when the markets are down, but it also is important to remember when the economy and the markets are good.
One of the things we love to do on these market updates is give three positive signals and three reasons for concern.

The Positives

  1. It was a very strong year for investor returns, even with all of the noise. If we look at the numbers for 2023, there were zero recessions in 2023, despite all the talking heads on Wall Street saying we would have one.
  2. Inflation fell from 9% in the Fall of 2022 to 3.1% by November of 2023. The Fed’s target is 2%. But definitely, the trend was better than expected and in the right direction.
  3. One of the biggest outcomes of all this is now there is income and fixed income again. Just getting back to a normal relationship between cash and bonds and stocks, the interest component of bonds is an important part of that.

The closer you get to retirement, the more you want to be a little bit more conservative, which means you’re holding more bonds. And now it will pay you, which is extremely beneficial when you put together portfolios. Either way, holding bonds is a positive component of portfolios.

The Concerns

  1. Large company stocks have been driven by an exceedingly small number of participants. We’re calling them the Magnificent Seven now. Apple in 2023 was up 48.9%, Microsoft 58%, Alphabet Google 58.3%,  Amazon 80.9%,  Meta 194%, and Tesla 101%. Your money doubled in Tesla stock last year. The average stock in the S&P 500 didn’t do a heck of a lot last year while these seven companies drove the markets.

What’s the problem there? A rally based on a narrow handful of companies all pretty much playing in the same industry is potentially fragile. So, to feel good about it, we want to see a broad rally where all of the stocks are up a little bit instead of a few stocks up in a huge way.
It’s just a little bit magnified right now. Anything that can go up 200% in a year can also go back down at a staggeringly fast pace.

So when you think about something scary like that, it’s good to think about balanced investments.

If the soft landing scenario plays out, we don’t have a serious recession, we have a slowdown. Another potential outcome of this is we see those seven stocks run in place for a little while, while the rest of the market perks up. And so we can get to the point where this is a healthy rally. This doesn’t necessarily mean a bad outcome, it’s just something to be concerned about as a potential problem.

2. We’ve seen a lot of geopolitical risk over the last 12 months. The Ukraine conflict continues. We saw increased intensity in the Middle East. There is always potential that these issues are going to widen and become bigger conflicts. As they get bigger, the more distorted they become for the economy.

There is also good old American politics in the mix. As we’re listening to debates about government shutdowns and wondering how we are going to keep paying our bills. You can’t escape the fact that we’ve got a fairly attention-grabbing election coming up this fall.

We’ll be talking about American politics and presidential elections and the effects those can have on the economy.

Spoiler alert: It’s pretty unpredictable and not nearly as cut and dry or as fantastic as people assume it’s going to be. Every four years we have the same political discussion about presidential elections. We’re going to pull out all the old stuff, dust it off, and change the dates.

3. It’s still possible that inflation can increase. We’ve seen this nice steady downtick, but the economy is a fickle beast and we could see a return to inflation. If we see continued unrest in the Middle East, it will impact oil prices. Oil prices can impact inflation in the United States.

So that’s where we sit right now and it feels a lot different than last year. We wouldn’t say we are brimming with optimism, but at least we’re not coming out of a deep hole where it just seems like it’s going to get deeper. We do this quarterly because if we didn’t, it would seem like we were asleep at the switch, but you don’t want to think about your investments in three-month chunks. You want to think about them in 10-year chunks if you can.

If you haven’t checked out our prediction podcast, be sure to check that one out as well.  We have 12 months to be right. – The future will be surprising.

Don’t forget to subscribe to our YouTube Channel!

About Shotwell Rutter Baer

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Call us at 517-321-4832 for financial and retirement investing advice.

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