Q4 Commentary

Recently we wrote comparing investing with climate and weather in the Pacific Northwest, how unpredictable the weather is, and how far more predictable the climate is. The same holds true for short-term and long-term investing. In the short term anything can and does happen, whereas the long term has more stability. The economy and investing in 2023 were cases in point. One year ago, the consensus, which we agreed with, was the economy would suffer through a recession and equity markets would struggle. Trying to predict what the economy and capital markets will do in a one-year period (short-term) is as difficult as predicting the weather. So, what happened in 2023 and what is the outlook for 2024?

2023 Reviewed

First, the consumer proved more resilient than expected, or at least willing to, once again, run up debt. In the past, higher inflation put downward pressure on consumer spending. Yet in 2023 U.S. consumers doubled down and kept spending on trips and evenings out at restaurants along with other services to the tune of 5.4% jump in spending. Strong labor markets that saw jobs increase by almost 2.7 million gave consumers’ confidence to increase their spending levels. That job creation gave consumers a level of comfort that fueled the consumer. Second, business spending- which surged during the pandemic- increased at a rapid 6.3% rate through November, with a focus on structures and intellectual property to fuel future growth. Third, government expenditures increased just under 5% from the level in the fourth quarter of 2022. These three factors exceeded beginning of the year projections, helping avoid a recession.

Equity markets gave investors a wild ride last year and surprised investors and followed through on the strong 2022 fourth quarter with a 26.3% rise in 2023. The economy and falling inflation dominated higher interest rates, fueling the surge in equity prices. The bond market suffered through negative returns the first three quarters of 2023, dropping 1.2% only to rebound in the fourth quarter with a 6.8% jump, and finishing the year up 5.53%. In the end, the strong economy, falling inflation and the outlook for lower interest rates resulted in both stocks and bonds ending the year with strong positive returns.

S&P 500

Bloomberg Aggregate Bond Index

Our clients’ portfolios performed below the respective benchmarks, rising 22.4% in equities and 5.31% in fixed income. While this performance is- in the short term- not what we like, our portfolios did perform according to our construction process. Our clients’ portfolios outperformed when the markets declined in the first three quarters of the year and when the market performed normally or a 1-2% increase monthly.

What about 2024?

Predicting what 2024 is fraught with the same danger as predicting tomorrow’s weather, and likely to meet the same outcome: in need of constant revisions. In place of specific predictions on whether the economy will fall into a recession or not, or what the equity and bond markets will do, we will focus more on singular data points. First, we believe consumer spending will decline from the level of 2023, partly due to consumer credit card debt of more than $1 trillion (about $3,100 per person in the US), leading to gains in discount consumer discretionary companies. We strongly believe that interest rates will decline in 2024 leading to higher prices in bond markets and better performance from longer maturity bonds. The lower interest rates will also increase the value of growth companies and we therefore view technology companies of all market caps favorably. The increase in intellectual property spending will continue to pay dividends for companies and we are looking to increase holdings in those companies that are constantly investing in themselves through higher research and development spending. Although we are not providing a weather forecast for the year, we can assess the general climate and make a more accurate prediction for an individual company as a worthwhile investment to weather most any storm.

Clinton S. McGarvin, CFA, is a Senior Portfolio Manager. He received his B.S in Mathematics from The University of Arizona and an MBA/MSF from The University of Denver Daniels College of Business. Later Clint received the Certificate in ESG awarded by the CFA Institute. To speak with Clint McGarvin, or a member of our team, please contact our office at (503) 292-1041 or via email at info@allentrust.com.