When we look back at 2023, we’ll remember it as a banner year for markets. Stocks were up across the board and even bonds produced a solid return. That is not to say that 2023 was all smooth sailing. The 3rd quarter was pretty abysmal and that bled into October. But the November and December rally pulled markets ahead for a fantastic finish to 2023.
In my mind, the most important story as we exit 2023 is the Fed’s willingness to cut rates in 2024. The Fed indicated on December 13, 2023, that they were expecting three rate cuts in 2024. The expectation of rate cuts was the key driver of the market for the last 24 months. We now know that the Fed is all but done with rate hikes and is transitioning to a cutting cycle.
For context, rate cuts will be excellent for the bond market, and in our view, it will likely be a positive move for stocks as well. With that being said we’re looking at 2024 with optimism based on the information we have today.
Another story that I find interesting from 2023, is the contrast in performance between the so-called “Magnificent Seven” and the rest of the stock market. The Magnificent Seven are: Apple, Google, Microsoft, Amazon, Meta, Tesla, and Nvidia. (These seven companies had an average return of 111% in 2023). (1)
These seven companies are such a large part of the S&P 500 and Nasdaq indexes that they greatly influence the daily and cumulative performance of those indexes. In fact, despite there being 500 companies in the S&P 500 “the seven” make up nearly 30% of the weight!
This exceedingly high weight from these companies means they have an extraordinary influence on markets in both good and bad times. In 2023, the performance of “the seven” was in fact “Magnificent”. For those casually watching the market, you might think that in 2023 large cap stocks (aka the S&P 500) were dramatically outperforming small cap stocks. I wouldn’t blame you for thinking that as the S&P 500 total return was over 26% vs. the small cap return of only 16%. However, if you look at the equal weighted S&P 500 vs. the small cap return you see a different picture.
(The equal weighted S&P 500 merely allocates an equal percentage to each of the 500 companies. This mitigates the heavy influence of the largest companies.)
Put simply, exclusive of a handful of very large technology companies, U.S. Large, Mid, and Small cap companies were all up about the same in 2023. The type of concentrated return we saw from “the seven” in 2023 is not the type of portfolio we are attempting to achieve at FSG as we know the extraordinary gains can easily turn into extraordinary losses. In contrast, we prefer a far more diversified return from a far more diversified portfolio.
As I mentioned earlier, we are looking toward 2024 with a good deal of optimism but the market unknowns are always where problems occur. We simply cannot know when a global event will derail a positive market or when unexpected negative economic events may unfold. That in part is why we are excited about interest rates being cut. The cutting of interest rates is a great thing for bonds, and since we rely on bonds to help smooth out stock market volatility, we can now look at bonds as a vector of returns in the portfolio and not just a stock market hedge. For much of the last 3 years we have looked at bonds as an unfortunate necessity. Now we see their place in the portfolio as much more impactful to growth.
As always, if you have any questions or concerns, please do not hesitate to reach out to us. We hope you and your family have a very happy and prosperous New Year!
Written by: Brice Carter
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