2023 Recap, and a Look Ahead to 2024

The new year provides an opportune time for investors and portfolio managers alike to reflect on what did and didn’t go as expected in the market 2023, and what might be in store for 2024. Colin Day, CERTIFIED FINANCIAL PLANNER™ professional, is joined by portfolio managers Ryan Potts and Joe Anderson to discuss the pivotal role of big tech companies, known as the Magnificent 7, in shaping market trends, as well as international market dynamics, and the importance of risk tolerance in portfolio management.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our podcast Capital Conversations or view our recent blog posts.

Below is the transcript of our most recent episode of Capital Conversations, “2023 Recap, and a Look Ahead to 2024.”

Colin Day: Welcome, everybody, to another edition of Capital Conversations. I'm Colin Day, CERTIFIED FINANCIAL PLANNER™ Professional. With me today, Mr. Ryan Potts and Mr. Joe Anderson, our two Portfolio Managers. Ryan, Joe, how the heck are you today?

Joseph Anderson: Doing pretty well.

Colin Day: Yeah?

Joseph Anderson: Doing pretty well. Appreciate you having us on here, Colin.

Ryan Potts: Hey, it's a new year. I'm excited.

Colin Day: Chiefs are in the playoffs.

Ryan Potts: They are. It's a big thing. That's all I can think about right now

Colin Day: It was cool that you guys decided to join my Cleveland Browns in the playoffs this year. So, congratulations to you all, I guess. But today we're not going to talk football, as much as we might want to.

What we're going to talk about today is a little bit of a recap of 2023 from a market perspective, but then also looking forward to 2024, what we think maybe some opportunities are, maybe some interesting storylines that we as a firm might be interested in and maybe how that might [affect] how we handle our client accounts and how we work with individuals.

So, Joe, we'll start with you. When you think about the year 2023, major themes, big storylines, things that you think are interesting that we should recap and bring all of our viewers and listeners up to speed on. What have you got for us?

Joseph Anderson: Thank you. Well, a lot of stuff happened in 2023. A lot of chaos. A lot of volatility. It was really a fun year and a tough year for a lot of investment managers. We saw a lot of big swings in the market. We saw a great fourth quarter rally that made all the numbers look really good at the end of the year.

So, just for some raw numbers, the S&P 500 was up about 26%, the Dow was up about 16%. We didn't see nearly as much growth in terms of the international and the emerging markets. The aggregate bond market was trending down for the third year in a row until the last quarter. Before the last two years, it had never been down back to back years. So, the bond market really kind of settled out.

We've got quite a few topics to really touch on here. But at the end of the day, it was a pretty good year. It was a lot of rebound from the end of last year. If you look at the last two years, however, the markets are flat or down, depending on which ones you're looking at. We're not necessarily out of the woods yet. We came into the 2023, and the majority of people on the street did. The recession was relatively imminent. All the major historical indicators were pointing towards it, but we haven't seen it yet. Doesn't mean we're out of the woods. Historically, it happens about seven quarters after most of those indicators trigger, and we're in quarter number seven right now.

Colin Day: Oh, really? Interesting. Interesting.

Joseph Anderson: Ryan, you want to talk about the Magnificent 7?

Ryan Potts: Yeah, just to piggyback really quick too on the volatility and everything. I mean, entering 2023, everyone was expecting recession, slowdown in the economy. It never came and the story kind of played out throughout the year. We saw the regional bank crisis in March. And you saw interest rates fluctuate quite a bit in the second half of the year. You saw a peak in the 10 year in October at 5% and really that rally in the fourth quarter had a lot of correlation to interest rates and really what they did and the market expectations.

So, like Joe said, it was a volatile year and, tough to forecast as it always is. Which is why we tend to lean towards the long game with our clients and make sure that, “Hey, we're helping you stay invested for the long term and meet your financial goals.”

The Mag 7 really carried the market last year. By the Magnificent 7, we're talking about the seven largest stocks within the S&P 500. They really accounted for the majority of earnings growth and much of the appreciation that we saw on the S&P 500. We talked about it this morning, but the S&P was up 26%. The MAG 7 was up close to 75%. The rest of the market was only up 10%. So if you account for the 10% the rest of the market did, the Mag 7 kind of carried the market in terms of about 16%, 17% of the return, so.

Colin Day: And if you were to maybe clarify just for the listeners, the Magnificent 7: Who are they? Yes. And what is the theme behind the industry sector that they might be concentrated in?

Ryan Potts: Absolutely.

Joseph Anderson: So, the Magnificent 7 was originally the FAANG: Facebook, Apple, Amazon, Netflix and Google. They've added in Tesla, which I don't know if that's still in or if they removed it. They added in NVIDIA and Microsoft, and Microsoft is, I believe, one of the top two or three biggest companies now in the world.

It really just kind of bloomed into basically big tech. It's the largest companies that I'm sure you all know about. And they've done great. They've done fantastic. We're a little concerned with the valuations on them now, Colin, actually. They're trading at the highest valuations since the tech bubble. So, obviously, Apple and Microsoft are in totally different scenarios than they were back in 2000, where they weren't making money, and now Apple's got $200 billion in cash just sitting there they can use at any point. They're definitely, definitely very expensive. And to kind of continue on that subject, we saw the biggest growth versus value return spread of almost 35%. And that was mainly due to the Magnificent 7, which are all classified as growth stocks.

Colin Day: Right. And I would say that if we expanded the – I know this is a 2023 recap that we're talking about right now – but if we were to go back just another 12 months beyond that to the beginning of 2022, and if we were to give more context to the growth in 2023, how would have those same seven, or let's call it the S&P 500, would have performed over the year 2022 when we compare it to a good year like 2023?

Joseph Anderson: Yeah. Actually in 2022 is mostly the exact opposite. I believe the value of stocks were down about 7%, the Russell 1000 value,where the Magnificent 7 and the NASDAQ were both down over 33%. They might have seven closer to 40%. So you definitely see bigger swings when you only have seven companies all in the same field. Another reason why diversification is key.

Colin Day: Right. And Ryan was talking about this morning. That concentration fact that, “Hey there as the 7 go, so does the U. S. stock market, right? So much of the earnings are just based on those seven, where the rest of the 493 were growing at about a 10 percent clip last year.

So, it's really important to understand, not just the fact that, “Hey, this is why we preach diversification in our accounts.” But also to smooth out that volatility so that we feel like we're focusing more on the plan. We're focusing more on the ability to meet our goals based on the portfolio allocations that we've discussed with clients in the past, as opposed to saying, “All right, we're just going to shove ourselves into something else that might be the hot ticket at the time.”

What about internationally? What do we see internationally, in regards to when we think about a big economy like China or more developed Western Europe countries? Where do we think we fell on the on the international side?

Ryan Potts: Yeah, I'll take that one. I think international has been a very interesting story.

Again, thinking long term here, over the last two decades, it's lagged the market predominantly. I know a lot of advisors have this home bias where, a lot of advisors that I've talked to outside of our firm are actually cutting internationals out of their portfolios. We saw that same story continue last year.

Internationals lagged the S&P 500 and really all domestic markets. That's why, at Correct Capital, Joe and I, we typically focus on the highest of quality companies in those markets. What I mean by quality is – really we're just looking at companies that have high profitability, strong balance sheets, strong valuations.

Predominantly those companies have fared much better than the rest of the markets. But you see like China last year, there was basically a credit crunch within their real estate market and a lot of slowdown within their economy. If you look back to 2022 and 2021, you did see a lot of – I hate to use the word hype – but a lot of hype around China and a lot of people kind of flooding that market. We've always been on kind of the skeptical side of that and we remain positioned that way going forward as well.

Joseph Anderson: Yeah, to piggyback on what's going on with China. With the one child policy they've had for so long, the Census Bureau, the World Census Bureau is expecting their population to be down to 800 million – they're about 1.3 billion right now – by 2100. The closest kind of example you can look at in history for that would be Japan, who's been basically flat. They almost got to all-time highs from 35 years ago. So, deceleration and in growth and deceleration in population's definitely not a pro. We've been very light on China as a whole. However, there, there are a lot of other different areas in the emerging markets that look great, specifically in Latin America where you have a lot of the population coming out of the third world, into the second world, getting access to the internet, getting access to cell phones and everything else.

So there's definitely opportunities out there. China again is one that we're gonna be very leery on probably for the foreseeable future. I would imagine for years.

Colin Day: Okay, very good. Not to shift gears too much off of what we're discussing with 2023, but last thing, just to maybe do a quick recap. When we go back to March, we talk about all those regional bank failures. Silicon Valley Bank amongst others.

That story – at least from what I read, and I think all of us are pretty active participants in at least reading material in regards to how stock market economic conditions are changing over time. After the summer, I feel like I didn't really hear much about those banks anymore.

Are there other fears? Are you hearing any other stories in regards to financial services in general as a market sector performing well, going down? What do we think as we think about overall economic conditions, and more specifically on regional banks?

Ryan Potts: Yeah, I think that it's actually a really interesting story and kind of compelling.

We can look to Q4 as kind of a guide to maybe what is to come in 2024 and going forward as well. In terms of the bank crisis that occurred in March, we think that that problem was squashed. The Fed came in and provided a ton of liquidity, basically saying that they're willing to bail out anybody at this point to try to save the financial market per se. A lot of those companies that did go under [had terrible balance sheets]. They had a lot of bad debt out there. And when rates were on the rise, they just weren't positioned for it and that's essentially what broke them.

Going back to Q4 and to your point, after May, you didn't hear about it the rest of the year. But from a valuation standpoint, from maybe a potentially attractive investment, banks look kind of interesting right now because a lot of the strong banks that are still around that are well diversified, that have strong businesses, they continue to operate and they are doing it at a lower multiple than the rest of the market. You kind of saw this run up in Q4 of the financials that was very compelling relative to the rest of the market. Not to say that, “Yeah, go dump a bunch of money into financial services right now,” but just keep an eye on it. And I think we find it to be maybe an interesting spot going into 2024.

Joseph Anderson: And you know when you have an area that's down, say down somewhere around 10% in 2023, that looks a lot more attractive than something that was up 20%, 30%, 40% percent in the last year.

Silicon Valley Bank, especially the big one that everyone talks about, their biggest issue is they put a huge bet on long term rates. So they jumped and bought a bunch of 30 year treasury notes. Which, once the interest rates went up, they went down 20%, 30%, 40%. And then people found out and a liquidity run happened. Really a lot of just mismanagement in terms of the risk management teams at the few banks who did have a lot of trouble. But we don't see that continuing to be systemic. We don't think it's going to continue to go forward. And we think that the valuations on a lot of those banks are very cheap, because a lot of people haven't still realized that, “Hey, the U. S. bank is still going to be doing just fine.

Colin Day: Okay. Very good. Let's shift to 2024.

So Joe, we'll start with you. So you got a lot of bullet points here. But let's think about maybe the storylines that we'll be following, maybe [in the] next three, six months. Anything of interest? Of course, there are things that are interesting. What are the things that are interesting you the most when we think about maybe the short term in 2024? What are some of the things that you're looking out for?

Joseph Anderson: Shorter term, actually today Bitcoin launched their first ETFs of 11 different ETFs. Which is a big, big change, a long time coming. I don't want to get too far into the weeds with it, but definitely something that we're going to be watching, seeing how money flows in and out, seeing how people access it. Definitely [will] be very interesting to keep an eye on.

Our biggest thing that we want to keep an eye on is pretty much inflation. We want to see how that's going to end up over the next quarter or two and how the Fed reacts. Towards the end of the year, obviously we've got a presidential election, which can really move what does well in the market depending on different policies and everything else. So we'll be watching that as we get a little closer probably towards June or July once we have a little more firm understanding of where everything sits.

Other than that, we're continuing to watch the unemployment numbers. We're continuing to watch the spending numbers for households. [Something] really interesting is going to be earnings here in the first quarter. There's a lot of earnings that are expected – even though I think Ryan and I are both a little more conservative that we think they might not hit the numbers.

So long story short again, the Fed and inflation is going to be the key.

Ryan Potts: To add to that just really quickly, I think the biggest thing in the short term for us is over the next three to six months is interest rates, where the Fed goes with them, and how fast they get to where the market thinks they're gonna get. This is a big story for us as we speak internally here at Correct Capital.

But if you look back in 2022 or 2023, you see interest rates play a big factor on the way that the market's performed. And if you look into the October timeframe, August [and] October, you see interest rates on the rise substantially. When the 10-year peaked at 5%, we saw the market kind of bottom at that 4,100 number. Pretty much right after October 17th, interest rates fell to 3.8, and the market rallied up to 4,800.

So I think for us, the way the market shifted in terms of their expectations for interest rates, has led to a lot of the frothiness that we've maybe seen in the fourth quarter. If the Fed isn't able to pivot as fast as people want them to or expect them to, we can see volatility in the market in the short term, especially if rates continue to climb the way they are.

Colin Day: Well, and then looking a little bit farther – we're not prognosticators here, of course. What are some of the other things that – again, because we're long term focused investors, I think that's fair to say. Most of our clients are those people that are nearing or in retirement that need the investment management help, that want to reduce the volatility over time, to smooth out the return so that they can be consistent in their outflows, making sure that they have long term success.

When we think about that and when we think about the long term focus, because we are worried, of course, about 2024 and how things are going to perform, considering the storylines that you both just shared. But how are we positioning our clients for success past 2024? When we think about the kinds of investments that we're putting ourselves into – as well as our clients – what do we think about going a little bit farther, even to 2025, 2026, if we were to go out even further, what do we think about when we're putting together a portfolio for those clients?

Ryan Potts: When we're building portfolios for clients, the most important part is that we're keeping them involved in the markets long term. And that we're also focusing the portfolios around their individual goals and needs. So Joe and I have positions in the market. We have opinions on certain sectors and allocations and everything. The long term goal for us is to get our clients to meet their financial needs. And you do that by staying invested long term and not panicking and potentially selling at a bottom or buying at a top.

So we focus on long term asset allocation and making sure that their portfolios are aligned with those goals. So different timeframes, different risk tolerance, everything being taken into consideration.

Colin Day: Right. Joe, anything to add there?

Joseph Anderson: It's pretty much just risk management. Stay invested [and] historically you do incredibly well. I think the stat we went over today is if you've been invested in the market for 10 years in a rolling period, everyone's made money. You've never lost money. Now, with that being said, we are really attracted in the value space, we think that they're very cheap. We're very attracted to the small cap space. They're trading historic spreads between valuation. But again, just stick with your plan. It might not beat the market or the index every year, but we want to make sure that we can take out as much of the peaks and valleys in our clients by being well diversified.

Colin Day: Yeah. Okay. Well, I think that is a great place to end this particular podcast. So gentlemen, thank you so much for joining us, Ryan, Joe, we'll of course have you guys on probably at some point in the future, I think. I appreciate you all watching or listening to this, however you are digesting Capital Conversations. And until next time, take care.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember, investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered to Clients or prospective clients where correct Capital Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by correct Capital Wealth Management unless a client service agreement is in place.

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