Looking Back and Ahead
Every January we like to recap the previous year and restate some of our team’s core beliefs about investing in the equity markets.
First, and most importantly, the core beliefs:
The economy cannot be consistently forecast, nor the market consistently timed. We therefore believe that the highest-probability method of capturing equities’ long-term return is simply to remain invested.
We are long-term owners of businesses, as opposed to speculators on the near-term trend of stock prices.
Declines in the mainstream equity market, though frequent and sometimes quite significant, have always been surmounted, as America’s most consistently successful companies ceaselessly innovate.
Long-term investment success most reliably depends on making a plan and acting continuously on that plan.
An investment policy based on anticipating (or reacting to) current economic, financial, or political events/trends most often fails in the long run.
Second, and less importantly, the current observations:
A Recap of the Last Two Years in the Equity Markets
In 2022, the Dow, the S&P 500 and the Nasdaq 100 experienced peak-to-trough declines of 21%, 25% and 35%, respectively.
By the end of 2023, however, all three were in new high ground on a total return basis (that is, including dividends).
Why stocks did this is irrelevant. There are almost as many theories and explanations of why as there are market commentators. The important takeaway is that investors had to avoid getting scared out of their positions in one year to participate in the gains of the next. That is how the stock market works.
A Recap of the Economy
We remain convinced that the long-term disruptions and distortions resulting from the COVID pandemic are still working themselves out in the economy, the markets, and the society itself, in ways that can’t be predicted, much less rendered into coherent investment policy.
The central financial event in response to COVID was a 40% explosion in the M2 money supply by the Federal Reserve. It predictably ignited a firestorm of inflation.
To stamp out that inflation, the Fed then implemented the sharpest, fastest interest rate spike in its 110-year history. Both debt and equity markets cratered in response.
Despite this, economic activity just about everywhere but the housing sector has remained relatively robust; employment activity has, at least so far, been largely unaffected.
Inflation has come down significantly, though not yet close to the Fed’s 2% target. But prices for most goods and nearly all services remain elevated, straining middle-class budgets.
Capital markets have recovered significantly, as speculation now centers on when and how much the Fed may lower interest rates in 2024, and whether a recession may yet begin. Whatever they do. These outcomes are unknowable—probably even to the Fed itself—and don’t lend themselves to forming a rational long-term investment policy.
Significant uncertainties abound. Trends in the U.S. federal deficit and the national debt continue to appear unsustainable. Social Security and Medicare appear to be on paths to eventual insolvency unless reformed. The serial debt ceiling crisis continues, and a bitterly partisan presidential election looms. The markets will face significant challenges in the year just beginning — as indeed they do every year.
Our overall recommendations to you are essentially what they were two years ago at this time, and what they’ve always been. Let’s revisit your most important long-term financial goals soon. If we find that those goals haven’t changed, we’ll recommend staying with our current plan. And if our plan isn’t changing, there’ll most probably be no compelling reason to materially alter your investment strategy.
Finally, as we always say—but can never say enough—thank you for being our clients. It is a genuine privilege to serve you.