Behold, a Recovery
2023 comes to a close as the wall of worry is summited
By: Allison Schmidt, Financial Advisor, CFP®, CPA
2023 was a good year for stocks, well some stocks. At a high level, the overall market as measured by the S&P 500 did very well, up 24%* for the year. Most of that return was driven by 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla). Michael Hartnett, of Bank of America, coined these stocks the “Magnificent 7”. These 7 stocks returned 111%* in 2023, truly magnificent. The Magnificent 7 put the other 493 stocks of the S&P 500 on their back and climbed up the wall of worry pulling the index back to within 0.56%* of an all-time high by year-end.
This was all in the face of bank collapses, devastating war, political infighting resulting in a near government shutdown here at home, and a Fed that continued to hike rates methodically into the summer, where we had a pause at 5.50%, which is where we sit today. Despite these headwinds, stocks remained resilient, continuing to climb the wall of investor worries. In the last week of the year, we were within 1% of an all-time high on the S&P 500. Most of the year’s return came in just the last 8 weeks of the year, now that’s a Santa Claus rally!
Even though 2023 may already feel like a bit of a blur at this point, we wanted to put out a piece that would give you a snapshot of what happened broadly, but also in your accounts at Higgins & Schmidt Wealth Strategies. Be sure to check out the follow-up article, Beware, a Cautious Climb Continues, coming out next week that will look at our outlook and (spoiler-alert) our cautious optimism moving forward.
Here at home…We continued to implement our investment process. This is a process we discuss frequently here and want to make sure to point out how we’ve implemented each piece on your behalf throughout the year.
All of our accounts start with your own Personal Investment Policy and are built on Modern Portfolio Theory, and then we implement two main strategies as the markets move, we refer to them as tactical opportunities and economic realities.
- Tactical Opportunities: Throughout the Bear Market that began at the beginning of 2022, we purchased stock for our clients twice as the market retreated. We purchased the S&P 500 when the index fell 10% and 20% off its all-time highs. The market bottomed out in October of 2022 at -25%*. We make these stock purchases to address that our portfolios have as much stock exposure at the bottom of a market decline as they did at the top, so that the portfolios can recover more quickly. This worked. The last week of the year, you probably noticed a slew of trade confirmations showing the trades we made in your account to pull off those positions, collect the gains, and rebalance back to our original allocations. Market movement can benefit investors. Market declines, bear markets, and recessions are all a normal part of investing in stocks. The tactical opportunities portion of our process in a bear market allows us to take advantage of where the market is trading in the moment, which has historically been a buying opportunity.
- Economic Realities: Bonds. In my opinion, bonds have been the most interesting asset class over the past couple years. We’ve never seen interest rates increase this fast. Never. We’ve never had bonds (as measured by Bloomberg US Aggregate Index) decline as much as they did in 2022. Never. The index fell 13.01%*, with longer term 30-year treasury bonds declining by a staggering 29.3%*. This price decline can be attributed to the increase in interest rates– the Fed Funds rate went from 0% at the beginning of 2022 to 5.5% today. Our bond portfolios have changed substantially for our clients over that time frame. We came into 2022 owning very short-term, high quality fixed income and alternative assets. Our goal was not income. To be fair, there was none to be had. Our goal was principal stability. This worked. As interest rates have risen over the past 24 months, we have added longer term bonds to the portfolios, starting in the summer of 2022 with laddered bond portfolios and ending with an addition of 10-year treasury bonds at the end of October of 2023 when the 10-year touched 5%. Our goal now is both income and principal stability. Bonds are bonds again, and let’s just say we are here for it.
Overall market performance was strong in 2023 by most measures. Check out the 2023 markets roundup. We feel confident heading into 2024. Please check out our next piece in this 2-part market series, Beware, a Cautious Climb Continues, coming out next week for our thoughts looking forward. Happy New Year!
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Higgins & Schmidt Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation does not ensure a profit or protect against a loss. Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
