January Newsletter to Clients

Enjoy this month’s edition that features a review of 2023.

In our May, 2023 newsletter we wrote about some predictions of the stock and bond markets through the end of the year made by professional investors surveyed by the investment publication Barron’s. At the time, the value of the S&P 500 Index of large, U.S. companies was 4192. The survey posed two questions, as follows:

            How will the S&P 500 perform the rest of 2023?

• 36% of respondents said the index’s value would rise 1% finish about 4234;
• 28% of respondents said the index would fall 13% and finish about 3647;
• 36% of respondents were neutral – the market would finish about the same.
• The index finished at 4770 – 13.8% above where it was in May and up 26% on the year! That was largely driven by the so-called Magnificent 7 companies – think Apple, Microsoft - as more than two-thirds of S&P 500 stocks returned less than the index in 2023.

Is the U.S. stock market overvalued, undervalued or fairly valued?

• 47% said overvalued;
• 45% said fairly valued;
• 8% said undervalued.

So, why the big increase when the professionals, experts, and poohbahs indicated they thought the market was either overvalued or fairly valued? Because inflation cooled considerably, prompting the Federal Reserve to indicate they intended to keep short-term interest rates where they are and might even cut rates during 2024. Additionally, despite consensus opinions that called for a recession in 2023 – Bloomberg gave it a 100% chance of occurring – the U.S. economy grew at faster than a 2% annual rate the first six months then accelerated to 4.9% during the 3^rd quarter. The 4^th quarter is estimated to finish at an annualized growth of 2.3% according to the Atlanta Federal Reserve’s model. This momentum kept earnings up, which is the most important measurement for investors.

Why do interest rates matter? Stocks tend to do better with lower interest rates because they can borrow less expensively and that especially matters to smaller companies. And bond values rise as interest rates decline, as counter-intuitive as that may seem.

The rest of the stock and bond markets:

While we often use the S&P 500 as a proxy for the stock market, there are other, important components that make up our portfolios. Here is how they performed in 2023:

• The Dow Jones Industrial Average of 30 large, legacy companies rose 16%;
• The Russell 2000 index of small company stocks rose 16.6%;
• Foreign stocks rose 18.8%;
• The U.S. Aggregate index of bonds rose 5.5%.

Starting with my Dad, Bob Bova, over 40 years ago, Moneywatch has invested clients to help them meet their individual needs and by diversifying their portfolios appropriately to help smooth out the ride. That’s our legacy and our strong conviction for what’s in the best interests of our clients.

On behalf of the entire Moneywatch team, I wish you good health and prosperity in the new year!

Ramsey Bova, CFP®

Thank you for your continuing confidence.