January 2024
RATIONAL REFLECTIONS By Bell Institutional
2023 Year in Review The Difference a Year Can Make 2022 was a historically bad year for the market, leaving investors reeling. The S&P 500 plummeted 18.11%, its worst performance since 2008, while the Bloomberg U.S. Aggregate Bond Index (US Agg) suffered its worst year in history, dropping 13.01%. To make matters worse, both bonds and stocks delivered negative returns, which rarely happens. In fact, it had never happened going back to 1976, when the US Agg Index was created. The “60/40” portfolio, a traditional mainstay of portfolio construction, was dead with a return of -16.07%. As quickly as it had plunged, the market staged a remarkable recovery in 2023. The S&P 500 returned 26.29%, the US Agg returned 5.53%, and the 60/40 portfolio enjoyed its best year since 2019, with a return of 17.98%. At the risk of sounding like a broken record, the market has a knack for surprising even the most seasoned investors and prognosticators. 2023 was no different. Coming into the year, the “experts” had all but guaranteed a recession due to continued interest rate hikes, runaway inflation and poor investor sentiment (near all-time lows in the University of Michigan Consumer Sentiment Index). Theories of a hard landing reverberated in the echo chambers, and poor returns were sure to transpire. Compounding the issue, to dissent from the popular narrative was to risk reputational damage (particularly if you were wrong). With the benefit of hindsight, we can now confidently say that the economy remains robust, employment figures continue to be strong (with roughly 2.5 million more jobs than unemployed workers), GDP continues to rise, and inflation continues to fall. We can also say the echo chambers and popular opinion were wrong, again. Coming into 2024, the pendulum has swung the other way. The popular narrative today calls for the current “Goldilocks” period (falling inflation coupled with a strong economy) to continue for the foreseeable future. It also holds that the Fed will cut the fed funds rate six times to a range of 375-400 basis points. (One basis point equals 1/100th of a percent, so 400 basis points, as an example, is equal to 4%.) This is 1.5% worth of cuts! This stands in contrast to Federal Reserve officials stating (via the December 2023 Federal Reserve Forward Guidance) that they expect the fed funds rate to end 2024 around 4.6%. In essence, the market believes the Fed will cut interest rates by 72.5 basis points more than the Fed itself does. As you can see, the market has a penchant for getting ahead of itself. Market moods can swing from extreme optimism to panic in the blink of an eye, and the popular narrative always seems to be the most dramatic. 1