Introduction to 2023
The only way to reflect on 2023 is first to acknowledge that the past couple of years have been challenging for investors. Most investors have experienced both 2022 and 2023 together and not in isolation.
Stock Market Recovery
2023 has been a year of recovery for the US stock market, notably outperforming other global stock markets. Despite this rebound, it's essential to recognize that returns merely compensated for the previous year's downturn.
Bond markets paint a different picture. The average high-quality bond in 2023 had done 8% in total return; however, it is still down 10% if we take both years together.
The most notable event of 2023 has been that interest rates are now north of 5%, and cash holders can now generate a high return by simply holding on to their cash positions.
However, in the note of cash, individuals holding large sums in 2023 have also been holding these same large sums in 2022 and before.
As experienced wealth advisors, we know that most individuals holding large sums of cash do not usually invest at the bottom of the market or the top. However, they continuously have this position as they need to be more comfortable investing.
The Inflation Crisis
So, let's talk about the past couple of years regarding the cause of such a challenging environment before we look into 2024.
The underlying cause of this challenging environment has been a significant surge in inflation in 2022. Multiple rationales were driving the root cause of this inflation; however, the outcome in dealing with this inflationary crisis was an increase in interest rates by central banks from 0% to rates higher than 5% over the past two years.
Taking this back to cash holdings, it is simplistic to only look at the nominal return on cash being high at the moment without looking at cash's lost value in purchasing power. $100 in 2021 is now worth around $92 regarding what it can buy. Therefore, even holders of cash who have been happy with the recent surge of interest rates are down in purchasing power due to the primary cause of inflation, which has driven up interest rates anyway.
2024 & Beyond in this Context
This inflation crisis and the following interest rate hikes have been the primary driving force of market performance and are extremely important to touch on.
And the most critical review of 2023 is that we see this crisis has ended. Take a look at this chart, which shows just that. This chart shows how inflation peaked and then came down.
And there are multiple theories on the cause of this peak and decline:
- Inflation was a shock due to the after-effects of COVID-19, where supply lines were broken due to shipping, ports, and volatility in demand for goods. This was then swiftly followed by the war in Eastern Europe and the cutting of various types of trade with Russia. Inflation was brought down as the world’s supply lines changed routes and recovered to a new normal (which takes time).
- And there's a 2nd camp that says that inflation peaked due to earlier monetary stimulus and has come back down due to government policy.
Regardless of which force is greater, the event to celebrate is that the inflation crisis that has driven such a turbulent time for all wealth holders is now over.
Therefore, as we look into 2024, on this disinflationary track (inflation coming down), all the predictions are that interest rates will also go back down.
That's the primary cause of why there's been such good equity and bond market performance over the past three months, which will also be the primary driver of 2024 and onwards.
AI was a big deal in 2023, and it's not slowing down. Companies are going to start using AI more in their day-to-day work, making it a normal thing. We're also expecting new types of AI and better technology to support it, which could save companies a lot of money.
Breakthroughs in treating Alzheimer's and cool tech in healthcare are about to shake things up. Some good investment opportunities might be in areas like brain science and biotech.
How Countries do Business
The way countries such as Mexico and India do business with each other is changing. It's not as global as before. Things like political disagreements and countries competing with each other economically are shaking up how the world works. This could be a big deal for the markets.
What this all means for investors
It has indeed been a challenging few years. As most of us look to preserve this wealth for very long periods of time, when allocating our wealth towards equity markets, we capture the ownership in these earning-producing companies that live off the value they bring to society, whether it be in producing goods or services. These companies in various industries and circumstances are well placed in 2024 to continue to generate high-quality earnings.
Regarding the bond market, allocators of wealth are lending companies money to finance their operations and get a longer-term fixed compensation. Considering that interest rates have peaked and the risk of large-scale bankruptcies is low, 2024 is well-positioned to be a fantastic year for diversified bond exposure.
Happy New Year
That said, we are here with you every step of the way. We wish you and your loved ones the best of health and prosperity over the coming year and beyond.
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