2023 financial market appreciation was well above expectations.
Despite two wars, multiple bank failures, the highest global inflation seen in decades, and the U.S. almost defaulting on its debt, both stock and bond markets appreciated significantly. Global equities were up 21.5% (MSCI All Country World Index), while the broad U.S. bond market was up 5.2% (Bloomberg U.S. Aggregate Intermediate Index). This time last year, many economists were predicting a mild recession. It did not occur, and U.S. GDP grew by over 2%. While a recession will occur someday, the current consensus is that it will not likely be in 2024.
A limited number of very large companies drove U.S. equity market performance.
The U.S. stock market was up 26% (Russell 3000 Index), a quick recovery from the drop in 2022. Much of the return was driven by Apple, Google, Amazon, Nvidia, Microsoft, Meta, and Tesla, all having had negative returns in 2022. While these seven positions were in every one of our client’s portfolios, we avoid the temptation of trying to pick the winners each year. No one knows when the growth of these stocks will slow relative to the market, but they will, as no stock can outperform the market forever. The U.S. equity market’s 8.5% appreciation over the past three years is consistent with our long-term expectations.
While most foreign stock markets had positive returns, China was down.
Non-U.S. stock markets appreciated by 15.6% last year (MSCI All Country World Index, ex U.S.). Some of the best-performing major non-U.S. markets were Brazil and Taiwan (in U.S. Dollars). Unexpected was China’s market dropping 11% in U.S. Dollars. While many strategists believed that China’s decision to reverse their “zero Covid” strategy would lead to pent-up demand driving growth, Chinese consumers remained cautious. Even though its economy remains the world’s second largest, exposure to Chinese stocks is typically less than 3% in our portfolios and in line with the MSCI Index.
U.S. inflation and interest rates may have reached peaks for the time being.
Inflation, as measured by the Consumer Price Index (“CPI”) most likely peaked in the summer of 2022 and is now down to 3.1% over the past twelve months. The trend looks promising. To ensure that inflationary expectations did not become entrenched, the U.S. Federal Reserve continued to raise interest rates throughout most of 2023. One-year Treasuries started the year at 4.7%, peaked at 5.5% and have recently dropped to 4.8%. Longer maturities followed a similar pattern, with the 10-year Treasury peaking at 5% and now offering yields around 3.9%. HTG’s fixed income strategy continues to blend funds with short maturities to earn the relatively higher yields with exposure to 5 to 10-year bonds to lock in reasonably attractive rates for longer.
Investing for the long term requires believing in the long term.
2023 financial market performance well exceeded the predictions of many experts. The year was another great example of the importance of not letting near-term concerns change a long-term investment strategy. There will be many concerns during 2024 – geopolitical, technological, pandemic, global warming, and what is likely to be an emotional U.S. election. Consistent with the past three decades, HTG will continue to help our clients maintain the appropriate mix of global equities for their long-term goals and sufficient less volatile fixed income to meet their short-term needs.