Wow, wow, wow! What a dramatic year-end turnaround following the third quarter swoon from the market’s interest rate and inflation scare.
Maybe difficult market experiences are like (dare I say?) childbirth – give it a year or two and you forget the pain and just remember the joy.
Do you remember 2022? The Dow, S&P 500, and Nasdaq 100 all experienced peak-to-trough declines of 21%, 25% and 35%, respectively. Yet at year-end 2023, all three were in new high ground on a total return basis (including dividends).
Why stocks did this is irrelevant to the wonderful lessons to be drawn from this experience. What matters most to us long-term, goal-focused, plan-driven investors is not why this happened but that it did happen. It is amazing that there could be such a significant stock market decline over most of one year, and those declines be entirely erased in the following year. I am not aware of any market prognosticators or market timers who successfully forecast the market action of both 2022 and 2023.
Here is our year-end scribble in two parts: the enduring principles reinforced by these two years, and then a consideration of current conditions.
- The economy can neither be consistently forecast, nor the markets consistently timed. Thus, we believe the most reliable method of capturing stocks’ long-term return is to remain invested.
- We are long-term owners of businesses, not speculators on the near-term trend of stock prices.
- Declines in the stock market, though frequent and often scary, have always been surmounted as the world’s most successful companies ceaselessly innovate.
- An investment policy based on anticipating or reacting to current economic, financial, or political events, often fails in the long run.
- Long-term investment success generally depends on making a plan and acting on that plan with ongoing adjustments to fit your life.
- The long-term disruptions and distortions resulting from the COVID pandemic are still working themselves out in the economy in ways that can't be predicted, much less rendered into a coherent investment policy.
- A key financial event in response to COVID was a large increase in the money supply by the Federal Reserve. Supply chain disruptions, combined with the ballooning money supply, ignited a firestorm of inflation.
- To stamp out that inflation, the Federal Reserve implemented the sharpest, fastest interest rate spike in its 110-year history. Both the bond and stock markets cratered in response.
- Despite this, economic activity has remained relatively robust nearly everywhere except the housing sector; employment activity has been largely unaffected.
- Inflation has come down significantly, closing in on the Fed's 2% target.
- Capital markets have recovered significantly, as speculation now centers on when and how much the Fed may lower interest rates in 2024, and whether a recession may yet begin. These outcomes are, of course, unknowable.
- Significant political challenges abound including the 2024 election and our current dysfunctional congress. The markets will face significant challenges in the year just begun - as indeed they do every year.
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