Replay of our webinar hosted January 18, 2024, where we discussed some of the surprising events and results from 2023 and how we can apply the lessons learned as we navigate 2024.

Last year at this time, we wrote about how you can choose what to focus on when reflecting on calendar year performance. 2022 had been a horrible showing with stocks falling into a bear market (driven by the “magnificent seven” stocks, down an average of -45.2%). Bonds were not far behind, reaching an intra-year low of -17% and ending the year down -13%¹. Those headlines dominated the narrative, with many proclaiming the “death” of the balanced portfolio (often referred to as the “60/40” due to target weightings in stocks/bonds).

We can’t help the strong mix of negative emotions the headlines create from many different perspectives. As humans, we feel empathy and grief given the very real suffering caused by the wars in Ukraine and now Israel and Gaza. As citizens, regardless of which side of the aisle our political views sit, we feel sad to see the House of Representatives without a leader for the first time in history. And as investors, if we only read the headlines and the underlying articles in our major news outlets, we feel panicked because it seems as if there’s never a good time to invest given all the uncertainty.

As we review the first half of 2023, simply speaking, it’s hard not to be pleased by stock and bond market returns. Taking a few additonal moments to consider the sentiment entering the year after negative returns in 2022, including the expectations of both economic and corporate earnings recessions, (not to mention the unanticipated regional banking crisis and debt ceiling negotiations!), we can easily move from anxious to pleased to relieved. Generally, economic and corporate earnings data have been better than expected – let’s dig deeper into the details to identify the key takeaways.

June 1, 2023 – ChatGPT, the artificial intelligence (AI) platform from OpenAI heavily funded in partnership with Microsoft, was unleashed on the technology scene late last year and reignited the debate about the future of AI. This includes, of course, its impact on society, business, and politics. There are pros and cons, and it’s still very early to assign a high probability to the broad impact. More specifically with regards to the way we invest, we don’t view it as a particular threat or game-changer. Rather, it could result in markets incorporating information into prices more efficiently, which would be a positive for our investment approach.

May 1, 2023 – You have likely seen the news that JPMorgan Chase has purchased First Republic Bank and is planning to integrate its operations into Chase’s as seamlessly as possible. We wanted to provide you with our opinion on what this means both for markets and customers of First Republic.

“Happiness equals reality minus expectations” is a saying that applies to life, financial planning, and investing. Travel and dining experiences are great life examples. When we have low expectations, it doesn’t take an amazing adventure or Michelin star meal to make us happy. If our expectations are high, the hurdle to happiness is higher. Financial markets are no different. By nature, markets anticipate future events and assign them a price today (discounting). The gap between reality and expectations creates short-term market volatility, just as it did for both stocks and bonds in 2022.

March 13, 2023 – Just as we were getting ready for another weekend of rain and snow in the Bay Area, a financial storm was brewing in markets with the liquidation of Silvergate Capital (crypto industry lender) on Wednesday, and then, more surprisingly, the FDIC takeover of Silicon Valley Bank (SVB) Friday morning and Signature Bank over the weekend. This morning we awoke to President Biden giving a press conference urging calm and confidence in our banking system.

February 3, 2023 – We all learned in high school civics that Congress has the “power of the purse” in our democratic republic. Congress, and Congress alone, passes annual spending plans and other bills that obligate the government to spend money. Just a month ago, President Biden signed a 1.7 billion dollar spending plan that passed both houses of Congress just days earlier. Included in the bill was disaster aid and emergency assistance to Ukraine and NATO, while the bulk of the money went to nondefense discretionary programs (Social Security and Medicare as examples) and to defense spending. 

Inflation moderated through year-end, as did the magnitude of interest rate hikes. Fed Funds’ target range now stands at 4.25-4.5%. The FOMC’s hawkish tone and expected peak range still remain slightly at odds with market participants, with the market expecting a lower peak and relatively quick shift to rate cuts to stave off weakness in overall economic growth. Some SF Fed projections show the “effective” Fed Funds rate over 6% currently when trying to estimate the impact of the Fed’s balance sheet runoff in interest rate terms of economic tightening in conjunction with the Fed Funds rate hikes. Other major central banks began slowing the pace of rate hikes, or even pausing, to the let the impacts play out and try to balance the risk of over tightening. Though moderating, inflation remains elevated across most of the globe, China being the exception. This year, inflation and interest rate levels remain a key focus, yet there are bound to be unexpected risks that will shift the narrative. 

December 16, 2022 – As the year comes to a close, it’s a natural time for self-reflection and taking stock of what has been and looking forward to what may come. With this in mind, we’re sharing some core beliefs that we’ve developed from decades of investment analysis and experience navigating challenging market environments like 2022.